Guillermo Capital Budget Recommendation

Guillermo Capital Budget Recommendation
Judy Blackman
October 31, 2011
Linda Miller

Guillermo Capital Budget Recommendation
Guillermo Furniture located in Sonora, Mexico produces mid-grade and high-end sofas.   Until the late 1990s the company had increasing profit, but profits began to shrink because of recent changes in the business environment and economy (University of Phoenix, 2009).   After researching Guillermo determined that he had to make changes to stay in business. I have been asked by Guillermo to study the different opportunities available, which are a high-technology solution and a broker solution and to determine which would produce the greatest return on his investment.   To determine which alternative solution would be the best for the company it is necessary to differentiate between the different capital budget evaluations techniques.  
Capital budget evaluation techniques
When analyzing the cash flow associated with capital investment there are several techniques, which can be divided into two categories.   The first category uses techniques using time value of money concepts is the first category.   Included in the first category are techniques such as the payback method and the unadjusted rate of return method, which are easier to understand but less accurate.   The second category includes techniques, which ignore the time value of money.   Include here are techniques such as the net present value method and the internal rate of return method.   They offer major improvements in accuracy but are more difficult to understand (Edmonds, 2007).
One method, which is simple to apply and easily understood, is the payback method, which shows the amount of time necessary to recover the initial cost or cash outflow of the investment.   If an investment has a shorter payback period it is usually considered better.   Profitability is not measured by the payback method but instead only investment recovery is measured.   Measured in years the...