Guilermo Furnitur Store Paper

In: Business and Management

Submitted By mscozy
Words 1785
Pages 8
This paper will look at the different alternatives that are available to the management of Guillermo's Furniture Store. The paper will include three different alternatives that Guillermo's could use, and what the optimal Weighted Average Cost of Capital (WACC) of each option will be presented along with techniques for reducing risks. There are many forms of capital budgeting models that can be used. Payback made simple, NPV, IRR, and Payback discounted.
The payback period:
The simple payback period can be defined as “the expected number of years required to recover the original investment.” (Emery 2007) For example, if Guillermo’s invest $300 million in one of its projects, within that particular time period Guillermo should able to receive back the original money invested. For example, Guillermo’s cumulative cash flow is at t = 0 is just the initial cost of -$300,000. In the first year the cumulative cash flow is the previous cumulative of $300, 000 plus the first year for the cash flow of $500: -$300,000 + $42,573=-$257,427. In comparison the cumulative for the second year is the previous cumulative of -$257,427 plus the inflow of cash from the second year of $42,573, resulting in –$214,854. Therefore the calculations of payback occurred during the third year. If the $40,584 of inflows comes in evenly during the third year, then the exact payback period can be found as follows:
Applying the same procedure to the other two alternatives (Project High-Tech and Broker) you are able to find the payback period for them in about one and one-half years and just less than six years respectively. Since these two alternatives are being scoped for possible alternatives, the project that includes technology would be accepted but current project would be rejected. If the projects were mutually exclusive, High-tech would be ranked over Broker and Current because High-Tech…...

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