Guillermo Furniture Store

Guillermo Furniture Store Analysis
FIN 571
October 1, 2012
Gupreet Singh

Guillermo Furniture Store Analysis
Guillermo Navallez is facing challenges in his furniture store business. Guillermo has been a leader in the furniture store business in his area of Sonora, Mexico for years. This has changed as new competition has become a concern. Operating the furniture store as he has done in the past is no longer an option if Guillermo wishes to remain open and operating, and he must make a capital budget decision about the future. The choice will depend on financial factors and must continue to allow Guillermo to remain competitive in what is becoming a highly close and competitive global marketplace.
This paper will provide an evaluation of the three alternative options available to Guillermo and the financial outcomes of these choices. The alternatives will be evaluated at current production levels and at a reduced production rate of 50% through a sensitivity analysis to ensure he could remain open if production declined. The weighted average cost of capital (WACC) and the net present value (NPV) will be calculated and various valuation techniques to reduce risk will be examined. Based on the data a recommendation in the concluding remarks will be made regarding which alternative will afford Guillermo the best return.
The best capital budget option will be the alternative with the highest positive NPV as “a positive NPV increases wealth because the asset is worth more than it costs” (Emery, Finnerty, & Stowe, pg. 76, 2007).   There are three alternative options available that Guillermo must consider.   The first option is to continue to operate as he has in the past. Guillermo has good resources and relatively low labor costs remaining the same with increased competition is not the best alternative. The second option is to upgrade his operations and provide products through a high-tech automated solution, reducing labor costs, but costing more up...