Fin 571 Week 4

1710 Words Apr 22nd, 2010 7 Pages
Guillermo’s Furniture Store Scenario

There are three alternatives available to the Guillermo’s Furniture Store. One is they can keep the current position or they can become broker or make it high-tech. Therefore, Guillermo’s furniture store can divide the project into current project, High tech project and the broker project.

Guillermo’s furniture store needs to select the option which is good for them and can provide competitive advantage to the store. It has been clear that managers are responsible for the use of capital budgeting techniques to find out exclusive project. We have different types of capital budgeting techniques. These capital budgeting techniques are:

1-Simple Payback, and/or Discounted
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In real live project with more cash flow after the pay back period would be more valuable than Project with no cash flow, yet its payback and discounted payback make it look worse. This is the reason, the shorter the payback period, other things held constant, the greater the project’s liquidity. Apart from this, since cash flows expected in the distant future are generally riskier than near-term cash flows, the payback is often used as an indicator of a project’s riskiness because the longer the payback period the higher is the risk associated with the project (Brigham, 2004) (Fabuzzi, 2003).

Overall there is only one major demerit of the discounted cash flow method that it do not consider the cash flow generated by the company after the payback period and due to this a project with high cash flow after the payback period is rejected in front of a project that pays no cash flow after the payback period.

Net Present Value (NPV):

NPV is known as the best technique in the capital budgeting decisions. There were flows in payback as well as discounted pay back periods because it don’t consider the cash flow after the payback and discounted pay back period. To remove this flows net present value (NPV) method, which relies on discounted cash flow (DCF) techniques is used to find the value of the project by considering the cash flow of the project till its life. To implement this approach, we proceed as

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