Guillermo Capital Budget
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Guillermo Capital Budgeting Methodologies
Guillermo Navallez has been making furniture for many years in Sonora, Mexico and now is facing challenging times as foreign competition has entered the area. The competitor is using technological advancement that can produce customized furniture at a lower price. As a result, ”Guillermo watched his profit margins shrink and , as prices fell and costs rose” (University of Phoenix. (2011, ). Guillermo needs to determine how to make his business profitable, maintain his market share and keep a competitive advantage. There are a few alternatives (projects) for Guillermo to consider so he can achieve his goal. The first alternative (project) is for Guillermo to manage the store in its current state and keep operations as it has always been. The second alternative (project) is to apply high-tech advancements to produce custom furniture at a lower cost but faster rate. The third alternative (project) is to become a furniture broker for another company. “The objective is to find investment projects that will add value to the firm. These are projects that are worth more to the firm than they cost—projects that have a positive NPV” (Emery, Finnerty, & Stowe, 2007, p. 216). Once the proper Capital budgeting methodologies are reviewed, the Optimal Weighted Cost of Capital (WACC) will be determined and a sensitivity analysis can performed so Guillermo may consider all the information he has to make the best project choice for his business.
Capital Budgeting Methodologies
Guillermo must consider proper capital budgeting methodologies to find out which project will best fit his goal. The following capital budgeting methodologies should be utilized:
1. Net Present Value ( NPV)
2. Internal rate of Return ( IRR)
3. Simple payback and discounted payback.
The Net Present Value is ( NPV) defined as “ the difference between what something is worth ( the present value of its expected future cash flow-its market value) and what it...
Guillermo Navallez has been making furniture for many years in Sonora, Mexico and now is facing challenging times as foreign competition has entered the area. The competitor is using technological advancement that can produce customized furniture at a lower price. As a result, ”Guillermo watched his profit margins shrink and , as prices fell and costs rose” (University of Phoenix. (2011, ). Guillermo needs to determine how to make his business profitable, maintain his market share and keep a competitive advantage. There are a few alternatives (projects) for Guillermo to consider so he can achieve his goal. The first alternative (project) is for Guillermo to manage the store in its current state and keep operations as it has always been. The second alternative (project) is to apply high-tech advancements to produce custom furniture at a lower cost but faster rate. The third alternative (project) is to become a furniture broker for another company. “The objective is to find investment projects that will add value to the firm. These are projects that are worth more to the firm than they cost—projects that have a positive NPV” (Emery, Finnerty, & Stowe, 2007, p. 216). Once the proper Capital budgeting methodologies are reviewed, the Optimal Weighted Cost of Capital (WACC) will be determined and a sensitivity analysis can performed so Guillermo may consider all the information he has to make the best project choice for his business.
Capital Budgeting Methodologies
Guillermo must consider proper capital budgeting methodologies to find out which project will best fit his goal. The following capital budgeting methodologies should be utilized:
1. Net Present Value ( NPV)
2. Internal rate of Return ( IRR)
3. Simple payback and discounted payback.
The Net Present Value is ( NPV) defined as “ the difference between what something is worth ( the present value of its expected future cash flow-its market value) and what it...