The Guillermo Furniture Store Scenario

1099 WordsOct 23, 20115 Pages
The Guillermo Furniture Store Scenario Susie Smith FIN/571- Corporate Finance September 26, 2011 Danica Djordjevich, Instructor The Guillermo Furniture Store Scenario Guillermo Navallez is the owner of a furniture manufacturing company located near his New Sonora, Mexico home. This company specialized is handcraft products priced at a slight premium for the quality they represent. This scenario presents a challenge from the arrival of new competition from overseas that has entered the furniture market with headquarters a few miles from Guillermo’s location. This new competitor uses a high-tech approach and provides furniture to exact specifications at rock-bottom prices. In addition one of the largest retailers located a few…show more content…
The total cash flow for this alternative is $293,519.67, the WACC is 10.63%, and the NPV is $265,306.31. These three alternatives are able to earn returns greater than the cost of capital, what this means is value to investors because capital expenditures are finance via issuance of stock. Sensitivity Analysis As mentioned above the NPV’s of the three alternatives have a positive outcome. However, if Guillermo decreases both mid-grade and hi-grade production levels by 50% the implications and effect on NPV change dramatically. Taking a look of the first and third alternative after the change reflects the following: Alternative One – Continue Current Operation Total cash flow: ($2,050.09) WACC: 5.74% NPV: ($1,948.95) Alternative Three - Broker/Distributor Total cash flow: $90,285.88 WACC: 10.75% NPV: $81,522.91 In each of these alternatives notice both negative cash flow and negative NPV. What a manager views these performances there seems to be returns less than the cost of capital therefore investor’s value are whipped out. Alternative Two – Hi-Tech Total cash flow: $79,715.36 WACC: 10.66% NPV: $198,266.57 This alternative has a positive cash flow and a positive NPV. Upon review the WACC here is more than in the first alternative but less than the WACC of the third alternative. In businesses or projects when the return is

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