Guillermo Furniture Capital Budget Recommendation Essay Example

proposed capital budget inflows. It searches for an investment project with a net present value of zero and present value of net cash. Although the payback method and unadjusted rate of return disregard the time value of money, they are quicker and easier to calculate, making them ideal for smaller investments. The payback method calculates the time needed to recover initial investment costs and recommends a shorter payback period. To determine the payback period, use this formula: Payback Period = Net cost of investment ? Annual net cash inflow. Another non-discounted cash flow technique is the unadjusted rate of return or simple rate of return for capital budgeting.

The calculation of investment cash flows involves using the simple rate of return method, which disregards the time value of money. The unadjusted rate of return is obtained by dividing the average increase in annual net income by the original investment's net cost. To determine a project's net present value, subtract its cost from the present value of its cash flows. A negative outcome indicates that the expected present value of cash flows is lower than the investment's cost, thereby leading to rejection or adjustment through investing at a required rate. Conversely, positive net present values indicate that implementing projected investments and generating cash flow would be more beneficial compared to investing at a standard rate of return.

In order to determine the net present value, it is necessary to identify both the cash inflows and outflows as well as the required rate of return on the investment (Edmonds, 2007). For projects that are already in progress, the internal rate of return method can be utilized to recreate a

cash flow that matches the project's cost. Typically, more profitable investments will have a higher internal rate of return. To calculate IRR, simply divide the proposed investment by net annual cash flow in order to generate an internal rate of return factor. This factor can then be used to find the present value of an annuity of 1 table which takes into account both project service life and number of periods.

The internal rate of return is the discount rate closest to the factor, according to Edmonds in 2007. The payback method calculates the time needed for a company to recover its initial investment in cash. However, this approach has a major drawback as it neglects any future cash flows and the salvage value of purchased assets. On the other hand, the discounted payback period technique considers discounted cash flows that have been discounted to their present value and is similar to payback period in measuring the investment recovery time.

Guillermo Furniture is facing competition and needs to alter production methods. After examining financial data on Hi-Tech and Distribution options, it is clear that Hi-Tech furniture production should be pursued. Despite revenue increases being similar in both options, switching to Hi-Tech can result in a 353% profit increase. The attached excel worksheet provides a breakdown of this calculation. (CliffsNotes).

According to (com), investing in hi tech is a favorable option for Guillermo furniture as it has a positive net present value and an impressive internal rate of return of 0.998. Therefore, it is highly recommended to consider investing in hi tech.

After careful analysis of financial data and implementation of key capital budgeting techniques, it is recommended that Guillermo

Furniture invests in hi-tech furniture manufacturing as a means of surviving in a highly competitive marketplace.