Capital Budget Recommendation: Guillermo Furniture

Capital Budget Recommendation Guillermo Furniture ACC/543 Monday October 8, 2009 YouKnew Abstract Guillermo Navallez is the proprietor of a successful furniture and manufacturing gild located in Sonora, Mexico. Navallezs establishment is known for its theatrical role pieces, crafting a miscellanea of chairs and tables from the abundant supply of timber in the area. In the late 1990s, Navallez competitors became a touchable threat to the ongoing success of Guillermos Furniture and Manufacturing caller-up, producing like quality furniture for a fragment of the cost.What is more, the competitors were producing these pieces at an alarming ramble, and using high-tech equipment and absolutely no labor cost. Over the years, Navallez noticed that his meshwork margins shirked as prices decreased and costs increased. Navallez decided to do his own research on some of his competitors and detect that to keep up, many of the local competitors was either consolidating by merger or acquisi tion. Navallez, being proud of his accomplishments did not want to industrialize his company and contacted rise Accounting soaked to help him with alternatives to match the competitors.Wells Accounting starchy plan of action is to assist Navallez by helping him understand the dissimilarity between the various not bad(p) budget techniques, and then providing Navallez a recommendation on the best-fit project to bring Guillermos Furniture and Manufacturing high society back to excellent financial health. Capital Budget Recommendation Guillermo Furniture Wells accounting firm was contacted by Guillermo Navallez, business owner aft(prenominal) realizing that his company faced considerable profit loss with the intrusion of competitors producing like quality pieces for a fraction of the cost.Wells accounting firm was challenged to help Guillermo Navallez understand the various groovy budgeting techniques and to put in a recommendation to restore Guillermos Furniture and Manufactu ring Company to excellent financial health. Wells accounting firm immediately went to work, employing various budgeting techniques such as the payback technique, break even analysis, and pull in devote value, internal rate of return, and notes time period expected based on a variety of alternatives. Each technique provides essential information for Guillermo Navallez, and helps the firm best watch over how to move forward.To best experience which approach would be most beneficial, the firm must branch determine Navallez Companys topical financial position. The figures below represent Guillermos Furniture and Manufacturing Company trustworthy financial position for front and current year, respectively. TOTAL ASSETS $1,350,627 USD $1,356,534 USD According to Guillermo Navallez, his company produces two grades of products to service a wide-range of customer Mid-Grade, and High-End. Navallez believes that his prices are reasonable.The first capital budgeting technique, the pay back technique, or the cash payback technique is used to identify time periods need to recover the cost of capital investments from the net annual cash flow produced by the investment. For example if Navallez decides to barter for equipment and continue manufacturing High-End products at faster rates, employing less human capital also deciding to purchase as opposed to leasing the new equipment, we depart calculate his payback as following Payback TechniqueInitial Investment1,200,000. 00 Estimated Useful Life10Years Estimated Salvage0 Estimated yearbook Cash flows Cash Inflow from Customer $ 217,630. 33 Cash outflow for Operating $ 77,298. 28 concluding Annual Cash Flow $ 140,332. 05 Cash Payback Period $ 8. 55 The payback period is associated with the serviceable life of the equipment (asset). In this case the payback period is unacceptable seeing that the period is longer than 60% of the life of the equipment (asset), yielding 86%.Another technique is the break even analysi s. This technique helps the firm understand the lour ranges of profit where margins are concerned. The firm will be able to determine when Guillermos Furniture and Manufacturing Company will begin to make a profit after all expenses are considered. For example, at current Guillermos Furniture and Manufacturing Company produces the following Break even analysis makes the following assumptions 1. Fixed costs are constant 2.Quantity of goods are constant per output 3. Variable cost are constant per output unit Because Break even is a variation of payback technique, the firm is able to further determine the monthly current or projected sales before Guillermos Furniture and Manufacturing Company yields a profit. Net present value is another technique taken into consideration. This technique uses time value of money, and determines the difference between costs and market values of projects. NPV Investment (150% of book value of assets) $(2,023,244. 07) Year 1 after tax cash flow $ 362,4 96. 81 Year 2 after tax cash flow $ 362,496. 81 Year 3 after tax cash flow $ 362,496. 81 Year 4 after tax cash flow $ 362,496. 81 Year 5 after tax cash flow $ 362,496. 81 When the net present value of the Guillermos Furniture and Manufacturing Company net present value is a positive number, the general rule is to approve the project because this means that the project will add value to the company.The intent of reviewing these techniques is to determine which project will yield positive profits for the company and how much profit can be expected. Similar to net present value is the internal rate of return, which is used to measure an acceptable investment opportunity. The internal rate of return is equivalent to the net present value rate of zero for an investment. When looking at a variety of alternatives, the firm determined that Guillermos Furniture and Manufacturing Company could be profitable using a variety of alternatives, thus the recommendation.Wells Accounting fuddled det ermined that Guillermos Furniture and Manufacturing Company should market and push the flame retardant product, while also coordinating the companys existing distributor network and essentially becoming a representative for the other manufacturer. Reference(s) Edmonds, T. P. et al. (2007). Fundamental financial & managerial accounting concepts. New York McGraw-Hill. Retrieved from the University of Phoenix eBook Collection. Fast4Cast. (2007). Retrieved from http//fast4cast. com/break-even-calculator. aspx