Capital Budget Recommendation: Guillermo Furniture

Capital calculate good word Guillermo article of furniture ACC/543 Monday October 8, 2009 YouKnew Abstract Guillermo Navallez is the knowledgeer of a successful furniture and manufacturing confederation located in Sonora, Mexico. Navallezs establishment is known for its quality pieces, crafting a variety of chairs and tables from the abundant supply of timber in the area. In the novel 1990s, Navallez competitors became a real threat to the ongoing success of Guillermos Furniture and Manufacturing Company, producing like quality furniture for a fraction of the cost.What is more, the competitors were producing these pieces at an grand rate, and victimisation high-tech equipment and absolutely no labor costs. Over the years, Navallez discover that his profit margins shirked as prices decreased and costs increased. Navallez decided to do his own research on some of his competitors and discovered that to keep up, many of the local anesthetic competitors was either consolidating b y merger or acquisition. Navallez, being proud of his accomplishments did not want to industrialize his caller-up and contacted rise Accounting unfluctuating to answer him with alternatives to match the competitors.Wells Accounting Firm plan of action is to assist Navallez by helping him understand the unlikeness between the various capital figure techniques, and then providing Navallez a recommendation on the best-fit project to bring Guillermos Furniture and Manufacturing Company back to excellent financial health. Capital Budget Recommendation Guillermo Furniture Wells accounting starchy was contacted by Guillermo Navallez, avocation owner after realizing that his company faced considerable profit waiver with the onset of competitors producing like quality pieces for a fraction of the cost.Wells accounting firm was challenged to help Guillermo Navallez understand the various capital budgeting techniques and to record a recommendation to restore Guillermos Furniture and Manufacturing 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 last-place present prise, internal rate of return, and property light expected based on a variety of alternatives. each technique provides essential information for Guillermo Navallez, and helps the firm best take in how to convey forward.To best determine which approach would be most beneficial, the firm moldiness first determine Navallez Companys current financial put down. The figures at a cut down place represent Guillermos Furniture and Manufacturing Company current financial position for previous 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 returns a wide-range of customer Mid-Grade, and High-End. Navallez believes that his prices are reasonable.The first capital b udgeting technique, the payback technique, or the cash payback technique is used to identify time closes essential to recover the cost of capital enthronements from the net annual cash flow produced by the investment. For example if Navallez decides to purchase equipment and continue manufacturing High-End products at faster rates, employing little human capital also deciding to purchase as debate to leasing the new equipment, we will calculate his payback as following(a) payback TechniqueInitial Investment1,200,000. 00 Estimated Useful Life10Years Estimated Salvage0 Estimated Annual change flows Cash Inflow from Customer $ 217,630. 33 Cash outflow for Operating $ 77,298. 28 Net Annual Cash Flow $ 140,332. 05 Cash Payback Period $ 8. 55 The payback period is associated with the useful life of the equipment (asset). In this case the payback period is inconceivable seeing that the period is longer than 60% of the life of the equipment (asset), yielding 86%.Another technique i s the break even analysis. This technique helps the firm understand the lower 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 divorce even analysis makes the following assumptions 1. Fixed costs are constant 2.Quantity of goods are constant per take 3. Variable cost are constant per output unit Because Break even is a variation of payback technique, the firm is able to shape up determine the monthly current or projected sales in advance Guillermos Furniture and Manufacturing Company yields a profit. Net present prise is another technique taken into consideration. This technique uses time rank 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) Y ear 1 after tax cash flow $ 362,496. 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 delight in the project because this means that the project will add value to the company.The figure 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 recomm endation.Wells Accounting Firm determined that Guillermos Furniture and Manufacturing Company should market and push the flame retardant product, small-arm 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