Guillermo Furniture Store Analysis
Michelle Adams
Fin/571
February 16, 2013
Instructor: Francisco Monsterrate
Guillermo Furniture Store Analysis Guillermo Furniture Store, located in Sonora, Mexico, is a large furniture manufacturing company that is owned by Guillermo Navallez. They are the manufacturer of hand-made furniture, including tables and chairs at a slight premium for the quality it represents. Guillermo began manufacturing furniture in his garage. In the late 1990s the good life Guillermo enjoyed began to unravel. Competition causes his sales to decline. An overseas competitor using high-tech manufacturing could offer their furniture at rock-bottom prices, and another competitor moved a few miles down the road and was one of the largest retailers in the nation. Labor cost began to rise and Guillermo’s profit margin shrunk as prices fell. Capital budgeting is “the process of choosing the firm’s long-term capital investments. This includes investments in such things as land, plant, and equipment. Capital budgeting is fundamental because a firm is essentially defined by its assets and the products and services those assets produce” (Emery, Finnerty, & Stowe, Pg 187, 2007). Capital budgeting projects are chosen and judged by the value they create for a company. The projects resulting in a positive NPV, resulting in an increase in stock value, are chosen over projects with a negative NPV and result in a decrease in stock value. This type of budgeting has a direct link to stockholders wealth, as the more successful the budgeting process for a capital project, the higher the value of the company. Guillermo Furniture Store has to face its competition and become more efficient in the production of its products and the distribution thereof, to remain profitable and have a competitive edge. A careful analysis of the company’s financial position and the alternatives available Guillermo Furniture Store is necessary. Analyses of the various alternatives of the company, which are, to become a broker, incorporate advanced technology in the manufacturing process, and produce furniture coating and flame retardant, are examined. The value of the idea, the comprehensive advantage and marketing efficiency are all principles to be considered in the change of operations for Guillermo Furniture Store. Various techniques regarding capital budgeting techniques and the best alternative for the organization will also be discussed, including a sensitivity analysis. The net present value (NPV) for future cash flows for each alternative will be considered; the internal rate of return (IRR), and the discounted payback period will also be analyzed. Guillermo Furniture Store alternative option of switching to primarily distribution from primarily production is a viable option. The opportunity costs and diversifiable and non-diversifiable risks are considered when choosing any of the alternative modes of operation. Diversifiable risks are not of importance to shareholders, non-diversifiable risks. These potential issues and or obstacles would be further examined during the capital budgeting process. Business risk is the inherent risk with the investment, which comes from merely operating the business. Business risk is also referred to as the operating risk. Financial risk is the way in which a project is financed. Guillermo Furniture Store’s liabilities and owner’s equity side of the balance sheet represents the financial risk (Emery, Finnerty, & Stowe, p. 187, 2007). The weighted average cost of capital (WACC) is the rate expected to pay on average to the security holders to finance an asset. The flame retardant process is proprietary technology that Guillermo can use to corner that segment of his market. The flame retardant production for March is less than plant capacity. The plant is able to manufacture 182 units and the
