Guillermo Furniture Analysis

The payback period looks at a project only until the costs have been recovered. This analysis tool is often ignored because it does not take into consideration the time value of money. The time value of money limitation of the payback period can be modified by using the discounted cash flows of a project for the analysis of when the outflows will be recovered.

The fixed cost is assumed that Larry has discovered the other fixed cost incurred. The total investment is $800,000. The worst case scenario assumes that Larry got a total line of credit from the bank in the amount of $400,000 and invested $400,000 from other source. The Notes payable – short term and the long-term debt is (11.8 + 3.7) = 15.5 % from Table F in the handout. The Loan interest and payment per year is ($400,000 * 0.155)= $62,000. The Income data from Table F indicates that there is a 0.4% of all other expenses net out of the total sales which equals to $109,908 (5,700,666 gallons * $4.82 *0.4%) .

The proposed LBO deal of Comark Building Systems is an attractive investment for Brazos because it fits into Brazos’ “sweet spot”- a reasonable priced company with solid cash flow and good management. We can project cash flow at $6.8 million in 2002 and $12.3 million in 2006. In terms of the purchase price at $40 million, it is very attractive because we can get very good Total Post Money Valuation at $194 million. We can also confirm that the Market Value/EBITDA (1.38) of CoMark is lower than its competitor’s (3.42) when we compare multiple ratios, which means CoMark is undervalued. However, there are two major concerns; gaining competitive advantage and determining comparable valuations.

Futronics Inc. is a $2 billion firm that sells communications services. Founded in 1937, Futronics Inc. has provided consumer products, as well as government systems and services, for well over half a century. Due to a sharp increase in competition, flattened sales, and external economic conditions, Futronics Inc. is implementing a corporate overhead reduction program. The proposal is to replace the company’s central office stores with outside vendors. The investment will cost $1,000,000 and yield incremental cash flows of $450,000 in year one (1), $350,000 in year two (2), $300,000 in year three (3), and $250,000 in year four (4). There is no salvage value of the asset, and the firm has a cost of capital of 8%. Using capital budget methods, Net Profit Value, Internal Rate of Return and Payback method, the capital investment can be appraised. Futronics Inc.

The Castillo Products Company was started in 2008. The company manufactures components for personal digital assistant (PDA) products and for other handheld electronic products. A difficult operating year, 2009, was followed by a profitable 2010. The founders (Cindy and Rob Castillo) are interested in estimating their cost of financial capital because they are expecting to secure additional external financing to support planned growth.

Our estimated cost of capital, 20.81%, is lower than Ricketts’ expected return, 30%-50%, thus the investment is worthy. However, it’s higher than other pessimistic members’ expected return, 10%-15%, making the decision more complex and requiring further valuation。

Bob’s Discount Furniture can be defined in one word, “innovative”. In almost every aspect of their business, Bob’s is setting the standard for the furniture industry. Founded in 1991 in Newington, Connecticut, Bob Kaufman had a dream to build a successful company. This dream stemmed from his own experiences. In 1976, Bob was involved in a motorcycle accident that left one of his legs partially paralyzed. He was sent to bed to recuperate from his injuries, where he then found the benefits of the waterbed in his recovery. This experience inspired Bob to become a waterbed salesman. He sold waterbeds in 24 stores across New England.

Star Appliance is looking to expand their product line and is considering three different projects: dishwashers, garbage disposals, and trash compactors. We want to determine which project would be worth doing by determining if they will add value to Star. Thus, the project(s) that will add the most value to Star Appliance will be worth pursuing. The current hurdle rate of 10% should be re-evaluated by finding the weighted average cost of capital (WACC). Then by forecasting the cash flows of each project and discounting them by the WACC to find the net present value, or by solving for the internal rate of return, we should be able to see which projects Star should undertake.

Thus, by year three the company will be making a profit off the investment as year three is 86.73 million profit by 55.35 cost giving the company a 31.38 million dollar surplus. Generally, a period of payback of three year or less is acceptable (Reference Entry) causing this project to be viable based off the payback analysis. Although, these calculations are flawed. The reason for this is because the time value of money is not taken into effect when calculating payback periods which is where IRR can further assist in a more realistic financial picture (Reference Entry).

BatesManor has to decide how their money will be spent on promotional activities. It is possible to spend more promotional money on communicating to retailers or for consumer advertising. Also, another option is to spend all of the money towards one promotional strategy.

The machine will have a depreciation of $140,000 for the first five years; this is determined by dividing the initial investment by five. The old machine will be sold in 2010 for $25,000 which is below the current book value of $36,000. This is why there is a capital gain of $3,850 that will add to the incremental savings plus the depreciation for that year. The new sheeter will be sold at the end of the last year for $120,000 which will be taxed at 35; this is why a cost of $42,000 appears for the last cash flow (Exhibit 1). The NPV is a positive $1,063,567 and the IRR is 36%, this shows that the project will add value to the company along with having a great return. The payback period for the project is 2.45…Using the growth rate of 3%, the sales are projected to be nearly doubled from 2009 with the new sheeter. However, Pitts believes that he would not be surprised to see them increase by 7% or

Our analysis attempts to answer the question, “What are the things a company must consider when analyzing a new investment or project?” According to the text, a firm’s first objective when deciding to take on new debt should be that its return on net assets (RONA) should be greater than its weighted average cost of capital (WACC). Since we are working with an income statement only and do not have an amount for net assets, we will instead use return on invested capital (ROIC), which measures how well a company is using its money to generate returns. Comparing a company 's return on capital (ROIC) with its cost of capital (WACC) reveals whether invested capital was used effectively. From our spreadsheet calculations we see that using our estimated operating profit provides us with a 19.9% return on invested capital with only a 7.2% weighted average cost for that same capital. If these numbers are even close to correct, George should definitely make the move.

After year 5, they cash flow will pick up where it left off and increase even higher until they sell the company. The IRR will be around 429%. And the value created from the small investment will be just under $45 million in only a 7 year period.

A target payback period will be set by the company and the proposals that recover their initial cost within this time will be acceptable. If a comparison is made between two or more options then the choice will be project with the fastest payback.

It is expressed in time or years. It is normally defined as the period, usually expressed in years, which it takes the cash inflows from an investment project to equal the cast outflows.