Guillero Essay

847 WordsJul 15, 20124 Pages
Guillermo Furniture Store Analysis Shasha Dawalram FIN/571 July 12, 2012 John Buchanan Guillermo Furniture Store Analysis Guillermo owns a successful furniture store in Sonora, Mexico. Recently a new overseas competitor who uses high tech machinery to produce goods has entered the market causing competition. Labor costs, which were relatively low for Guillermo also increased due to an influx of competitors in Sonora. Upon researching his competitors Guillermo concluded that he has two alternatives to choose from to possibly remain profitable. The first alternative is to use the high tech machinery to produce more furniture at a lower cost. The second alternative is to merge with another company. He also has the option of not making any changes and continue running his business the way he always has. Performing a sensitivity analysis will aid Guillermo in his decision. There are three criteria that need to be evaluated before choosing an alternative. Net Present Value (NPV), Weighted Average Cost of Capital (WACC), and the Internal Rate of Return (IRR). The best alternative will be chosen to keep his business running successfully. Sensitivity Analysis “The purpose of the sensitivity analysis is to directly assess the stability and strength of the decision to be made and its capability to stand in fron of the future trials of various factors, taken into consideration at the moment of making the decision” (Bujoreanu, 2011, p. 2). Net Present Value (NPV) “NPV is the difference between what something is worth (the present value of its expected future cash flows-its market value) and what it costs” (Emery, Finnerty, & Stowe, 2007, p. 221). The NPV is used to determine the profitability of an investment. A positive NPV indicates the project is worth investing in. “When making capital budgeting decisions, a firm evaluates the expected

    More about Guillero Essay

      Open Document