Guillermo Furniture Store Recommendation
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- Date Submitted: 09/02/2010 10:20 PM
- Pages: 12
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Guillermo Furniture Store is in financial trouble. Overseas competition has eroded the company’s profit margins causing the business to underperform. To remain competitive, Guillermo must evaluate other options that will enable his company to be a going concern. The current option is failing the business and must be replaced by either an automated, high-tech facility or Guillermo must become a broker. Using data on the pro forma statements, Team C will analyze the feasibility of the two options; then, calculate and compare the Weighted Average Cost of Capital (WACC), Net Present Value (NPV), and Internal Rate of Return (IRR). The result will be from a financial decision aligning the data results and calculations with the best alternative.
Alternatives
Guillermo is evaluating three alternatives to decide on the best investment for the company to grow the business. The alternatives divided into three buckets are:
Project A - the Status Quo Project: Significantly reduce production of high-end furniture and increase production of middle-end furniture with a slight adjustment to price-setting. With an increase of $0.02 over the current price optimizing its price setting based on current production capacity, the result is increase to net income with a lower cost of capital (Emery et al., 2007, p. 280). The sales history shows that middle-end furniture sells the best. This is the most conservative alternative, as it does not require any additional investments, just change of the product mix and price.
Project B - the High-Tech Project: Adopt the technology that the competition currently uses and purchase new high-tech equipment, thus increasing the fixed costs but also decreasing the variable costs (that are high due to the high cost of labor). For example, in 1983, a UK retailer, Burton Reproductions, invested in furniture manufacturing with highly mechanized methods at a cost of £1m or approximately $1.5 million (CM Archives, 2007). The company was able...
Alternatives
Guillermo is evaluating three alternatives to decide on the best investment for the company to grow the business. The alternatives divided into three buckets are:
Project A - the Status Quo Project: Significantly reduce production of high-end furniture and increase production of middle-end furniture with a slight adjustment to price-setting. With an increase of $0.02 over the current price optimizing its price setting based on current production capacity, the result is increase to net income with a lower cost of capital (Emery et al., 2007, p. 280). The sales history shows that middle-end furniture sells the best. This is the most conservative alternative, as it does not require any additional investments, just change of the product mix and price.
Project B - the High-Tech Project: Adopt the technology that the competition currently uses and purchase new high-tech equipment, thus increasing the fixed costs but also decreasing the variable costs (that are high due to the high cost of labor). For example, in 1983, a UK retailer, Burton Reproductions, invested in furniture manufacturing with highly mechanized methods at a cost of £1m or approximately $1.5 million (CM Archives, 2007). The company was able...