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- Date Submitted: 06/13/2011 06:14 PM
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Guillermo Furniture Store Analysis: Capital Budgeting Techniques Decide Optimal Alternative
The principles of finance exist to determine the monetary worth and health of an organization. These principles are designed to provide as objective an outlook as is possible such that courses of action and subsequent operations are transparent and accurate lest poor decisions be made with transient accountability. In the case scenario of Guillermo’s Furniture Store, the entitled owner understands the fundamental need for change to ensure continued business prosperity in the face of intensified competition and increasing costs. Indeed, Guillermo’s agenda is founded upon his desire to maintain his current standard of life; maintain income without increasing stress or need to commit more time to work (i.e. away from his family). Thus, he wishes to solidify his financial future by shifting the nature of his business in order to remain relevant in a market where increased labour costs and competition are prevalent. As an astute owner, Guillermo recognizes several potential avenues, each mutually exclusive to the others, to shift the primary nature of his business. The three alternatives under consideration are entitled: Current Project, High-Tech Project and Broker Project. In order to decide between the proposed alternative paradigms, thorough examination of principle financial metrics shall be generated to provide the basis for informed decision-making; capital budgeting techniques shall be employed. Specifically, the capital budgeting techniques to be employed are: Simple payback, Discounted payback, Net Present Value (NPV) and internal rate of return (IRR). Additionally, weighted average cost of capital (WACC), net present value (NPV) of future cash flows, a sensitivity analysis and discussion of risk mitigation shall be discussed as they pertain to each alternative.
Simple Payback Period
Emery, Finnerty and Stowe (2007) define simple payback as "the expected number of...
The principles of finance exist to determine the monetary worth and health of an organization. These principles are designed to provide as objective an outlook as is possible such that courses of action and subsequent operations are transparent and accurate lest poor decisions be made with transient accountability. In the case scenario of Guillermo’s Furniture Store, the entitled owner understands the fundamental need for change to ensure continued business prosperity in the face of intensified competition and increasing costs. Indeed, Guillermo’s agenda is founded upon his desire to maintain his current standard of life; maintain income without increasing stress or need to commit more time to work (i.e. away from his family). Thus, he wishes to solidify his financial future by shifting the nature of his business in order to remain relevant in a market where increased labour costs and competition are prevalent. As an astute owner, Guillermo recognizes several potential avenues, each mutually exclusive to the others, to shift the primary nature of his business. The three alternatives under consideration are entitled: Current Project, High-Tech Project and Broker Project. In order to decide between the proposed alternative paradigms, thorough examination of principle financial metrics shall be generated to provide the basis for informed decision-making; capital budgeting techniques shall be employed. Specifically, the capital budgeting techniques to be employed are: Simple payback, Discounted payback, Net Present Value (NPV) and internal rate of return (IRR). Additionally, weighted average cost of capital (WACC), net present value (NPV) of future cash flows, a sensitivity analysis and discussion of risk mitigation shall be discussed as they pertain to each alternative.
Simple Payback Period
Emery, Finnerty and Stowe (2007) define simple payback as "the expected number of...