Guillermo Essay Wk 4


Guillermo Furniture Store Analysis
Guillermo Navallez owes a furniture store in Sonora, Mexico.   Lately, he has seen a turn in the area where he does business, which has affected his sales and his costs to do business.   Guillermo has three alternatives in order to keep the company in the current position: Project Current, Project High-tech, and Project Broker.   After Guillermo has insight into which alternative would suit his store best, he can determine the weighted average cost of capital (WACC) and he can calculate the Net Profit Value (NPV).
To find the best option, there are various options that can be used from capital budgeting techniques; including: simple payback, discounted payback, and net present value.   In the Simple payback capital budgeting technique refers to the amount of time it will take Guillermo to recover his original investment.   The cumulative cash flow of Guillermo’s Furniture store at t = 0 is just the initial cost of -$300,000. At Year 1 the cumulative cash flow is the previous cumulative of $300,000 plus the Year 1 cash flow of $500: -$300,000 + $42,573 =   -$257,427.   Similarly, the cumulative for Year 2 is the previous cumulative of -$257,427 plus the Year 2 inflow of $42,573, resulting in –$214,854. We see that by the end of Year 7 the cumulative inflows have more than recovered the initial outflow. Thus, the payback occurred during the third year. If the $40,584 of inflows comes in evenly during Year 3, then the exact payback period can be found as follows:   Payback Period = 7 + ($1,989 / $42,573) = 7.05 years.

      Applying the same procedure to Project High-Tech and Project Broker, we find the payback period for them is 1.53 years and 5.89 years respectively. It is known that the shorter the payback period, the better. As the projects are mutually exclusive, meaning if a project is taken on, the other is rejected, Project High-tech would be accepted but Project Current would be...