Guillermo Analysis
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Guillermo Furniture Store Analysis
Brian Murphy
University of Phoenix
October 11, 2010
Guillermo Furniture is located in Sonora, Mexico. The founder and creator is Guillermo Navallez. The company grew to become a large furniture manufacturer for North America. Guillermo furniture remained successful until the late 1990’s when two forces combined to decrease his profitability. The first factor that affected his business was a new competitor that used high-tech equipment to develop the customized furniture. The second factor was the increase in cost of labor in Sonora, Mexico. The cheap labor was always a benefit of having the factory in this city. Guillermo was faced with three alternatives to increase his profitability. Guillermo will need to evaluate all three alternatives to determine which option would be the best option for the future of the company.
Alternatives
The first of the three available alternatives would be to maintain its current position. The second alternative is the high-tech option. This option would involve a high initial investment to purchase the high-tech equipment needed to compete with the new competitor. The third alternative would be to become a broker for another company. Guillermo will need to use the capital budgeting techniques to determine which of the three alternatives is best. “When making capital budgeting decisions, a firm evaluates the expected future cash flows in relation to the required initial investment” (Emery, 2007, pg216). Three criteria for capital budgeting are Net Present Value (NPV), Weighted Average Cost of Capital (WACC), and Internal Rate of Return (IRR).
Net Present Value
Net Present Value (NPV) is the difference between what something is worth (the present value of its expected future cash flows – its market value) and what it costs. “Another way to determine value is to use discounted-cash-flow (DCF) analysis and compute the present value of all the cash flows connected with...
Brian Murphy
University of Phoenix
October 11, 2010
Guillermo Furniture is located in Sonora, Mexico. The founder and creator is Guillermo Navallez. The company grew to become a large furniture manufacturer for North America. Guillermo furniture remained successful until the late 1990’s when two forces combined to decrease his profitability. The first factor that affected his business was a new competitor that used high-tech equipment to develop the customized furniture. The second factor was the increase in cost of labor in Sonora, Mexico. The cheap labor was always a benefit of having the factory in this city. Guillermo was faced with three alternatives to increase his profitability. Guillermo will need to evaluate all three alternatives to determine which option would be the best option for the future of the company.
Alternatives
The first of the three available alternatives would be to maintain its current position. The second alternative is the high-tech option. This option would involve a high initial investment to purchase the high-tech equipment needed to compete with the new competitor. The third alternative would be to become a broker for another company. Guillermo will need to use the capital budgeting techniques to determine which of the three alternatives is best. “When making capital budgeting decisions, a firm evaluates the expected future cash flows in relation to the required initial investment” (Emery, 2007, pg216). Three criteria for capital budgeting are Net Present Value (NPV), Weighted Average Cost of Capital (WACC), and Internal Rate of Return (IRR).
Net Present Value
Net Present Value (NPV) is the difference between what something is worth (the present value of its expected future cash flows – its market value) and what it costs. “Another way to determine value is to use discounted-cash-flow (DCF) analysis and compute the present value of all the cash flows connected with...