Premium Essay

Guillermo Capital Budget Evaluation

In: Business and Management

Submitted By widdlesis
Words 1274
Pages 6
Guillermo Furniture
Tabbatha Maynard
ACC/543
June 4, 2012
Curtis Brooks

Guillermo Furniture Guillermo Furniture, owned and operated by Guillermo Navallez, is at a point of needed to make a decision to help the company stay operational and profitable. There are many options that Mr. Navallez is considering and they need to be sorted through and examined. These options include acquiring a new hi-tech machine, becoming a distributor for a Norway company, selling his coatings (flame retardant and final coating) or no longer making these coatings and buying a similar product to use on his furniture.
Capital Budget Evaluation Techniques
To determine which option to choose, the techniques used to make this decision needs to be understood first. There are many capital budget evaluation techniques. The main ones that will be evaluated include net present value, internal rate of return, payback method and unadjusted rate of return. The first two are the most accurate and popular methods, but the other two methods are used as well. These methods can be used by themselves but are more accurate and effective if used in combination for the management team to have more information to base a decision on.
The Net Present Value (NPV) is the present value of future cash inflows minus the cost of the investment. This method combines two concepts of value. “First, it determines how much cash will flow in as a result of the investment, and compares that against the cash that will flow out in order to make the investment” (Marzec, 2012, para. 3). Because this happens over a timespan and will often pay for itself in the long run, “we also take into account the present and future value of money” (Marzec, 2012, para. 3).
The internal rate of return (IRR) “is the rate at which the present value of cash inflows equals the cash outflows” (Edmonds, 2007, Chapter 24).…...

Similar Documents

Premium Essay

Guillermo Furniture Capital Budget Restructure Recommendation

...Capital Budget Recommendation for Guillermo Furniture Managerial Accounting and Legal Aspects of Business ACC 543 Capital Budget Recommendation for Guillermo Furniture After careful evaluation of preexisting financial documents, an assessment has been made to determine what business decision will provide the greatest return for Mr. Navallez, owner of Guillermo Furniture. Presently, Mr. Navallez needs to re-strategize his business endeavors, because there is now new competition in the furniture manufacturing industry. The competition uses high-tech, automated machinery to mass-produce furniture at an end-price cheaper than Mr. Navallez can offer his clientele (Guillermo Furniture Scenario). Additionally, the competition has very little labor costs, as most work is done by machine; conversely, Navallez is projected to pay $44,065 in wages for the year of 2011 (Guillermo Furniture Financial Data Sheets). Although expensive, an option available to Mr. Navallez is to invest in high-end equipment and remain in the furniture manufacturing industry. In order to explore the possibility a potentially lucrative investment opportunity capital budget must be estimated and compared to the expected cash inflow. Capital budgeting techniques can be used to determine if the investment in high-tech machinery will provide a sufficient return on investment. Two methods commonly used are net present value (NPV) and internal rate of return (IRR). Additionally, the amount of time it will...

Words: 1029 - Pages: 5

Premium Essay

Capital Budgeting Evaluation

...Capital Budget Evaluation and Recommendation Guillermo Furniture Company handcrafts midgrade and high-end sofas. Changes occurring in the business environment and economy prompt the company to find different options of investing to stay in business. The newly hired accountant of the company is asked to differentiate the various capital budget evaluations techniques, and explain how these different techniques will assist in making the appropriate recommendation. The capital budget techniques used and explained for Guillermo Furniture Company are the Payback Period, Accounting Rate of Return (ARR), and Net Present Value (NPV). Capital investment is a processes organizations use to evaluate major investment opportunities. A capital investment decision is a decision to exchange current cash outflows for expectations of the company receiving future cash inflows. One must understand the time value of money concept assist a company in developing a rational response or decision to invest. The time value of money concept recognizes the present value of a dollar received in the future is less than a dollar. When a company invests in capital assets, it sacrifices present dollars in exchange for the opportunity to receive future dollars (Edmonds, 2007, p.1150). Time Value of Money Time value of money is necessary when comparing possible business investments that have different costs, cash flows, and service lives. Processing a discounted cash flow technique, such as the net......

Words: 1209 - Pages: 5

Premium Essay

Capital Budget Recommendation

...Capital Budget Recommendation Judy Milstead ACC 453/Managerial Accounting & Legal Aspects of Business November 26, 2012 Kyra Squirrel Guillermo Furniture Company is in the furniture business of manufacturing premium quality furniture. The total assets for Guillero Furniture Company from Dec 2010 ($1,350,529) to Dec 2011 ($1,356,411) will help in making the decision in exploring capital budget techniques. Until the 1990’s Guillermo was able stay afloat with just charging a premium rate for his quality furniture until competitors came on the scene. After reviewing his business plan to determine what could be change in the business to be able to compete with his competitors. In making this decision to update his production processes with new equipment or outsourcing the manufacturing to a Norway company or become a broker for this company. To evaluate the options available, many companies utilize various capital budgeting techniques in making the decision before investing in a new project. To base capital projects are evaluated on quantitative as well as qualitative analysis and information. To receive more information, it is best to used more than one technique to applied to a project. In exploring capital budget evaluations techniques to used various intermediate range decisions. In using this techniques will aid in the decision of resulting in the......

Words: 919 - Pages: 4

Premium Essay

Capital Budget Recommendation

...Guillermo Case Study: Capital Budget Evaluation Techniques ACC/543 Guillermo Navalles faces many financial challenges in order to succeed in the present business environment. In order to ensure the continued profitability and competitive edge of Guillermo Furniture, he needs to make an investment decision on where to direct capital. He is deliberating between directing capital to purchase advanced equipment, or to adapt a brokerage business model. In order to assess the financial viability of both investment options, he is considering the application of capital budgeting techniques to help him in decision-making. Capital budget evaluation techniques can use data from financial and operating reports to predict potential performance of corporate investment; these entail evaluation using a suitable technique and giving recommendations based on calculations of forecasted future returns of investment. Capital evaluation strategies can be differentiated into techniques considering the time value of money, and techniques ignoring the time value of money. Guillermo will apply both techniques and rely on certain assumptions with their accompanying degree of added risk. The evaluation analysis assumptions are that the investment capital is $5 million with a desired return of 8 percent to cover inflation and decreased sales, as well as a 10-year investment term due to equipment life. The datasheet corrections are as follows: • The brokerage option requires no......

Words: 1566 - Pages: 7

Premium Essay

Capital Budget Recommendation

...Capital budget recommendation ACC543 September 9, 2013 Capital budget recommendation As an industry leader of furniture production in Sonora Mexico, Guillermo Furniture has enjoyed many years of success. This success can be attributed to many factors such as the inexpensive labor found in the region, the ability to price furniture at a premium due to the lack of competition, and the abundant supply of materials found in the area that were needed to produce products. However, new competition as well has a growth in the economy causing increased labor cost has caused the profit margins of Guillermo Furniture to shrink substantially. The need for a new business structure and model has emerged in order for Guillermo Furniture to continue enjoying success and again obtain comfortable profit margins. Capital investment decisions can be critical to the success or failure of a business. Understanding the process of capital budget evaluation techniques is therefore an important step to decision making. Two basic categories of techniques exist, techniques that consider the time value of money and techniques that ignore the time value of money the later producing less accurate results but being easier to understand and compute. The time value of money concept takes into account that the current value of a dollar that is received in the future is less valuable than it is if received today (Edmonds, Olds, McNair, Tsay, Schneider, & Milam, 2007). The two most common time......

Words: 713 - Pages: 3

Premium Essay

Capital Budgeting Recommendation for Guillermo Furniture

...Capital Budget Recommendation for Guillermo Lynda D. Keller ACC543 June 23, 2014 Richard Collins Capital Budget Recommendation for Guillermo The first and most necessary goal of any organization is to maximize shareholder wealth. Maximizing shareholder wealth includes identifying and analyzing future projects that can provide value. Typically in a risk-return trade off the greater the risk, the higher the return. According to Krenz and Miller, “organizations undertake risky directions when the outcomes are so desirable that the probability of failure makes it worthwhile,” (Krenz & Miller, 2011, p. 18). Guillermo’s Furniture Store is facing increased competition, especially through consolidation of competitors. One option for Guillermo is to upgrade to current technology. This option is costly but can result in a substantial decrease in labor cost. Another option for Guillermo is to change the focus of his business from manufacturing to distribution using his existing distributor network. Keeping in mind that the main goal in capital budgeting is maximizing shareholder wealth managers will need to determine which projects will need to determine which projects will bring the largest return for the least amount of investment. In evaluating projects, there are many capital budgeting tools available to managers. These tools include net present value, weighted average cost of capital, and internal rate of return. According to a Duke University study, “75% of......

Words: 1044 - Pages: 5

Premium Essay

Capital Budget

...Peggy Parks was distressed after losing half of her 401k investment and she decided to do something about it. She researched for three years before deciding to make an unconventional purchase of $56,000 for seven alpacas. Peggy’s reasoning, because these alpacas are tangible assets, they are always in her control, unlike her struggling 401k. By the end of the first year, the investment paid off with two new baby alpacas making at least $15,000. Despite the initial success, Peggy is always looking for new ways to enhance her business. This paper will discuss capital improvements that will help her to do just that. Capital improvements are expenses connected with changes to enhance capital assets, extend their productive existence, or add to the worth of these assets. Capital improvements may improve usefulness or productivity or be renovations to the building or other structural improvements (Murray, 2014). Capital improvements can also be written off against income. Pond construction, barns, fences, driveways and parking lots are examples of expenses for breeders. Equipment such as pickups, scales, trailer, and tractors each has a suitable schedule for write-off. We have decided that it would be in Peggy’s best interest to purchase an additional male and female alpaca along with a larger barn for the animals. Alpacas are called "The world's finest livestock investment.” Alpacas also provide of extraordinary profits in the sales of offspring from your herd as well......

Words: 673 - Pages: 3

Premium Essay

Capital Budget

...SUVs. The last five years have seen a renaissance in the budget-oriented fuel-efficient segment of full-size sedans with all the traditional entrants such as Ford Taurus, Chevrolet , Toyota Avalon, and Nissan Maxima, as well as new players such as Hyundai Azera, all competing for the title of the ultimate large sedan. Other family-friendly car body styles like small and large cross-over vehicles (vehicles built on a car platform, but providing the utility of an SUV) have also increased in popularity in recent years. Chevrolet has a storied history in the full-size sedan market. The first launched as a 1958 model year vehicle. In its , was the best-selling car in the United States. current 9th generation has market share of ~18% and consistently sold more than 100,000 units per year on average from 2008 to 2009, the latest full year of data available. Property  of  General  Motors  Finance     June  2,  2014   Page  1   General  Motors  Sample  Case  Study     Assignment 1: Direct C ash F low A nalysis As an analyst in Operations Finance, your manager has asked you to create an Excel model with a direct cash flow forecast for the next generation using the information below. Prepare yourself to walk your interviewer through your Excel model and calculations. Assumptions: For simplicity, assume all cash flows occur at year end and there are no working capital requirements. 1. Development cycle (design and......

Words: 898 - Pages: 4

Premium Essay

Capital Budget

...Capital Budgeting Case for week 6 Capital Budgeting Process: Capital budgeting (or investment appraisal) is the planning process used to determine whether an organization's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. In the capital budget case the team analyzed and put a 5 year income statement for corporation A and corporation B. The income statement started with the information provided by the case information for the assignment It is important for business owners to analyze projects and their costs before going through with them. In order to do this they must project the value of the project to see if it is going to bring them the profits they desire. For example, if a business owner is interested in acquiring a new company, he or she must look at different aspects of the company as it is now and project the value over several years to ensure that a profit will be made. In the case presented, two companies are being compared to see which would be the better company to acquire based on income statement and cash flow projections, Net present value (NPV), and Internal rate of return (IRR). This paper will go over the reasoning for the final decision based on the analysis of the projections as well as the importance and differences of NPV and IRR. Net Present Value (NPV) The NPV is the difference of the discounted cash inflows and the discounted cash outflows. The......

Words: 271 - Pages: 2

Premium Essay

Capital Budget

...Learning Team A Capital Budget Recommendation Gerald Shaw, Kenneth Barre, Rosa Daws ACC/543 Linda Miller February 23, 2015 Learning Team Weekly Reflection Week 2 For this week’s assignment Learning Team A will be providing insight on the three capital budgeting techniques in relation to the Guillermo Furniture Scenario. Learning Team A after careful evaluation of the data sheets provided for Guillermo Furniture will identify the best uses for the three techniques and lastly provide a capital budget recommendation that best suites Guillermo Furniture. Three Capital Budget Evaluation Techniques-Gerald For Guillermo Furniture, Learning Team A will advise on three different capital budget techniques available to aid in the decision-making process. Those three methods are NPV (Net Present Value), IRR (Internal Rate of Return), and Payback method. NPV (Net Present Value) NPV or net present value helps an organization figure out whether it’s better to invest in a project based on the net amount of discounted cash flows for the project (Eldenburg, PhD & Wolcott PhD, CPA, CMA, 2011). NPV is best served positive which will indicate that the project will be a benefit by increasing the value of the organization. NPV is calculated through expected cash flows that include an initial investment, incremental operating cash flows, and terminal cash flows (Eldenburg, PhD & Wolcott PhD, CPA, CMA, 2011).......

Words: 973 - Pages: 4

Premium Essay

Capital Budget Recommention

...Capital Budget Recommendation ACC: 543 April 4, 2011 Fred Johnston Capital Budget Recommendation Capital budgeting techniques are used to determine long term goals, new investment opportunities, and estimating and forecasting future and current cash flows. With any capital budgeting technique measuring risk, uncertainty, and the cost of capital as well as anticipated project performances determines whether to accept the project or reject it. Capital budgeting allows Guillermo Furniture an opportunity to increase their offerings, decrease their cost and possibility find new funding sources to achieve its goals of the company. The payback period is the length of time that is required for Guillermo Furniture to cover the initial investment for the proposed project. The payback period determines how many periods it will take for Guillermo to return the initial investment. In using the payback period when having multiple projects to chose from the one with the shortest payback would be considered a good choice. Calculation of the payback period is summing the project's positive cash flows per period, typically annually, until the sum equals the project's initial investment (www.associatedcontent.com, 2009). The number of time periods passed before inflows are equivalent to original investment price represents the payback period (www.associatedcontent.com, 2009). Net present value method picks up where the payback period lacks because net present value provides a gauge......

Words: 792 - Pages: 4

Premium Essay

Capital Budget Recommendation

...Capital Budget Recommendation Capital Budget Recommendation Introduction Guillermo faces a big decision ahead. Not wanting to be acquired by a larger competitor or expand his management responsibilities by acquiring another organization, he had decided to move his company from being primarily a manufacturing company to primarily a distributing company. A competitor in Norway needs channels to distribute in North America and using his existing distributor network Guillermo could become a representative for the manufacturer while retaining some of his high end custom work. In addition, Guillermo has a patented process that creates a flame-retardant for his furniture coating but he will need to buy a separate product for a finish coating. Capital Budget Evaluation Techniques Guillermo has many evaluation techniques to choose from to make his capital investment decision. He can also combine more than one technique. The following is a description of the techniques he might use. Finding the Net Present Value (NPV) is one evaluation technique. Net Present Value is a comparison of the present value of the future cash inflows to the cost of projectors by subtracting the cost of the investment from the present value of the future cash inflows (Edmonds, et. al., 2007). “A positive net present value indicates the investment will yield a rate of return higher than 12 percent. A negative net present value means the return is less than 12 percent” (Edmonds, et. al.,......

Words: 687 - Pages: 3

Premium Essay

Capital Budget Recommendation

...Guillermo Furniture Company Guillermo Furniture has just employed you as an accountant. Two significant events affected the company’s financial stability and the owner. Thus, I will distinguish among the different capital budget evaluation techniques and explain how these diverse techniques to assist in providing the best recommendation to the company. I also recommend the present value calculations as part of the recommendation that base on a capital budget evaluation technique. Guillermo Furniture Store has located in a very well-known vacation spot in Sonora, Mexico and an excellent supply of timber. It provides Guillermo Navallez the ability to produce a wide variety of tables and chairs. Guillermo Navallez could price the handcrafted products at a slight premium for the quality because labor was relatively inexpensive. During late 1990’s abroad competitor went into the furniture market of Sonora using a high-tech approach that delivered the furniture to exact clients to determine the low prices. Sonora was also home and headquarters to one of the largest retailers in the nation. During the same period the city began to grow and with an increase in population, development expanded, and jobs raised the costs substantially. These events caused Guillermo to watch his profit margins shrink as the cost rose, and the prices fell. Capital budgeting is a process that managers use when they choose among a strategic investment opportunity (Eldenburg & Wolcott, 2011). It is one...

Words: 1252 - Pages: 6

Premium Essay

Capital Budget Recommendation

...Capital Budget Recommendation Managerial Accounting and Legal Aspects of Business Introduction As requested by Mr. Guillermo Navallez, owner of the Guillermo Furniture Company, an analysis of existing investment opportunities will be presented through various capital budgeting evaluation techniques. Furthermore, a brief synopsis of how each method assists in determining the investment opportunity with the greatest return will be reviewed. A recommended course of action will be provided coupled with present value calculations to support this proposal. Capital Budget Evaluation Techniques Various analytical methods exist to help business owners make wise capital investment decisions. Because there are many evaluation methods, it makes good business sense to apply the various techniques to the same proposal in order to obtain multiple perspectives (Edmonds, 2007). The Net Present Value (NPV) method which takes the time value of money into consideration, is the capital budget technique which focuses on increasing the value of the business. Using Guillermo’s project data, the marginal cash inflows are defined as the increase in net cash inflows compared to the current situation. Since we know the depreciation formula under the high tech option has a projected useful life of ten years, this is the period used for this analysis. Calculations are as follows: Current Situation High-Tech Option Annual Net Income (Pretax) $46,118 Annual Net......

Words: 1070 - Pages: 5

Premium Essay

Guillermo Furniture Capital Budget Recommendation

...Guillermo Furniture Capital Budget Recommendation Kendall Nicholson University of Phoenix Managerial Accounting and Legal Aspects of Business ACC/543 Curtis Brooks April 23, 2012 Guillermo Furniture Capital Budget Recommendation Guillermo Furniture is on the verge of making an important business decision. Increased competition and rising costs have shrunk its profits considerably. Although many of its smaller competitors are merging with larger corporation, Guillermo does not consider this a viable option. Guillermo Furniture must choose between upgrading to a high-tech computer controlled laser lathe that reduces labor costs dramatically and using its distribution channels to help a competitor to market its products. This option would result in Guillermo becoming more of a distribution network than a manufacturing company. Guillermo also has a patented process for coating its furniture. The flame retardant portion of this process is potentially profitable, but the finished coating is not as desired. Capital Budget Evaluation Techniques Several techniques are available to Guillermo to use for making a decision on which course of action is best. One technique is the net present value (NPV) technique. This technique compares the present values of future cash inflows against the initial cost and cash outflows of a capital investment. In this case, the future inflows of cash must be compared with the interest rate that Guillermo could receive on the......

Words: 1044 - Pages: 5