Guillermo's Furniture Store Scenario

Guillermo’s Furniture Store Scenario

Guillermo Navallez, owners of Guillermo’s Furniture Store, has been losing business since 1990 due to his competition having high-tech machinery that builds future at a cheaper cost. Navallez has to decide to keep their current position or join their competition with high-tech machinery. Navallez has three alternatives available which can be divided into three different projects: current, high tech, or broker. Using the capital budgeting techniques for each project will help Navallez decided which option will be good for his company and place his company at an advantage over his competition. Capital budgeting techniques Navallez can use are: Simple Payback, Discounted Payback, Net Present Value (NPV), and Internal Rate Of Return (IRR)

The simple payback period:

The simple payback period is the number of years a company is expected to recover after purchasing or investing a large amount of money. For an example if Guillermo’s Furniture Store purchase $300,000 in a project, the payback period is how much time the store will take to recover from its purchase. Payback period is the first method Navallez uses to evaluate capital budgeting projects. Guillermo’s Furniture Store’s cumulative cash flow payback period at t = 0 is adjusted as -$300,000. The first year the current cumulative cash flow is $300,000 plus the Year 1 cash flow of $500: -$300,000 + $42,573=-$257,427. Year 2 shows the previous cumulative of -$257,427 plus the inflow of $42,573, ending in –214,854. Continuing this process as seen on Excel Attachment 1 (Cap Budgeting Current) it will take Navallez seven years to recover from his initial out cost of $300,000; as long as Navalle’s income cash flow does not go below $40,584.

Using the formula for High-Tech and Broker projects, see excel attachment 2 (Cap Budgeting High-Tech) and excel attachment 3 (Cap Budgeting Broker), the payback period for the High-Tech project is 1.53 years. The Broker project’s...