Guillermo Store Analysis

Guillermo Furniture Store Analysis

The purpose of this paper is to provide analytical recommendation and also assess the value and risk return trade-off options available to the Guillermo Furniture Store. Some of the options that will be used Included in the weighted average cost of capital (WACC) calculation, net present value (NPV) calculation; the last part of the analysis will be to discuss the enhance of the valuation techniques in reducing risks.

The duty of handling risk and uncertainty are both important and complex in capital investment process; despite the complexity, managers and organizations must ensure to look for potential risks related to their projects and make certain that appropriate methods are used to reduce the risks (Investment Appraisal, 1999).

The Guillermo Company currently is searching for two new projects that will modify the current ways the company does business as well as its capital budget. One of the projects in consideration is upgrading the technology in the production equipments; this idea of a project came about after Guillermo’s assessment of its foreign competitor’s high technology advancement in production against his old fashion way of production. Some of the advancements include utilization a computer controlled laser lathe to produce exact cuts in the wood, robots performing the assembly functions. This advancement helped in reducing the cost of labor needed for the productions; additionally productions can be moved between products swiftly, and with a 24 - 7 production schedules, the shift-differentials are more than offset by the reduction in labor. Changing the Guillermo production model to this new model will be immensely expensive but, the benefit of it would dramatically decrease the production costs (University of Phoenix, 2011).

The second project in consideration is the possibility entering the distribution division of the furniture business. This idea became a project in consideration...