Fin 571 Week 6 Guillermo Furniture Store Recommendation

Guillermo Furniture Store Recommendations

Student

University of Phoenix

Corporate Finance

FIN/571

Teacher

Jan 4, 2011

Guillermo Furniture Store Recommendations

Guillermo’s furniture manufacturing company is located in Sonora, Mexico in a beautiful vacation spot. The company is the largest furniture manufacturing company in the area and has been manufacturing furniture for many years. The company has been doing very well until the late 1990s when two forces combined to cause financial stress to Guillermo. A new competitor from overseas entered the furniture market using a high-tech approach to building furniture. In addition, one of the country’s largest retailers established their national headquarters just down the road from Guillermo. Therefore, Guillermo must decide on one of three options for the company. First, Guillermo can upgrade to a high-tech manufacturing approach. Second, Guillermo can continue working as he has for years and give the customer the hand-made quality product they are familiar with. Last, Guillermo can be become a distributor for another manufacturer. The subject of this paper is to analyze Guillermo’s three alternatives and make a recommendation based upon financial data. The paper will also include a justification of the recommendation. In addition a pro forma cash flow budget for the organization for at least the next five years of each option will be created to support the recommendation.

Alternative One

The high-tech automation technology option is the best option for Guillermo’s Furniture Store. The high-tech automation technology option has the highest net present value (NPV) and shortest payback period of all three options reviewed. The positive discounted net cash flows withstand the sensitivity analysis. If the future cash flows from the high-tech automation technology option are at least half of the projected cash flows of $100,000 annually, this option would have a positive NPV of $341,766. This option gives...