Guillermo Furniture Analysis

1411 WordsDec 27, 20116 Pages
Guillermo Furniture Store Analysis Jay Jones FIN/571 September 27, 2011 Joseph Lyons DBA, CPA Guillermo Furniture Store Analysis Guillermo Furniture is facing a tough decision about what direction to take the business over the next several months and years. This paper will present several alternatives Guillermo Furniture may use and will include a sensitivity analysis. Financial and valuation topics covered will include net present value (NPV) and weighted average cost of capital (WACC) and will discuss how these alternatives, or techniques, are used to reduce risk. Guillermo Navallez is the successful owner of Guillermo Furniture for many years now. Located in Sonora, Mexico, Guillermo's store is specialized in…show more content…
Guillermo and other financial managers should be aware, however, that the stockholders may become negatively impacted if the capital cost goes down. To remain current, move towards the high-tech alternative or to move towards the broker solution, Guillermo has calculated that the IRR would be 6.9%, 64.7% and 11% respectively. Simple Payback Method This method is simply the number of years required to recoup the original investment cost of capital (Emory, 2007). This is a quick and easy method for giving investors a length of time that their investment would be paid for without regard to the time value of money. If the required return fits within the parameter of the payback period and other contributing risk factors are not enough of a deterrent then the investment may be worth looking at more closely. For Guillermo’s situation we will presume that his cost of capital for all three scenarios is $300,000. To transition the business using the hi-tech method and assuming the annual cash flow remains consistent from year to year, then the payback period would be: $300,000 / $195,564 = 1.53 years Conversely, for Guillermo to transition the business utilizing the broker method we would forecast stated and consistent annual revenue of $50,955, which would give a payback period of: $300,000 / $50,955 = 5.9 years Of the two scenarios Guillermo would most

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