Executive Summary
Guillermo Furniture Store: Capital Budgeting Projects
FIN/571
Purpose
Because of increased labor costs and foreign competition, Guillermo is faced with continually shrinking profit margins. As such, Guillermo is considering two primary capital budgeting projects including a shift from manufacturing to primarily distribution, and transitioning to a high-tech method of production (University of Phoenix, 2009). Because the objective is to select projects that add value to the firm, these projects should be worth more to the firm than they cost (Surendra, Lawrence, & Massimo, 2001). This document outlines two proposed capital budgeting projects including a financial analysis, value of options, capital rationing, financing alternatives, and final recommendation.
Capital Budgeting Project Overview
High-Tech Production Method
Guillermo’s foreign competitor uses a computer-controlled laser lathe to produce exact cuts in the wood. Though the technology costs are high, the reduction in labor expense is substantial as this highly automated production model uses robots that also perform the precise movement and assembly functions. Running on a 24-hour basis, production can move between products quickly with the shift differentials offset by the reduction in labor (University of Phoenix, 2009).
Broker
Using chain distributors rather then operating furniture outlets, another foreign competitor is looking for channels to distribute in North America. By coordinating its existing distributor network, Guillermo could become a representative for this foreign manufacturer. Though transitioning from primarily manufacturing to chiefly distribution, Guillermo could retain some of the high-end custom work (University of Phoenix, 2009).
Financial Analysis
_Guillermo Financial Project Data_
Valuation
Value of Options
The greater the numbers of options, whether to expand, postpone, or abandon, the greater the expansion project…