Hrm 531 Week 3

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Capital Budget Recommendation Guillermo Furniture, based in Sonora, Mexico, specializes in handcrafted quality products. In the late 1990s Guillermo’s profits started to shrink because of increased competition and rising costs. Guillermo does not consider merging with a larger competitor a viable option, as this would take away time spent with his family. Confronted with business options that affect the future of the company, Guillermo Furniture must choose between upgrading to a high-tech computer controlled laser lathe and becoming more of a distribution network than a manufacturing company for a competitor (University of Phoenix, 2013). Capital budget techniques assists in recommending a course of action for Guillermo Furniture based on the presented data. Capital…show more content…
Comparing the two values it stands to reason that the better investment for Guillermo Furniture is the purchase and expansion for a laser lathe. Further evidence supporting this recommendation is the IRR. Based on the calculation option produces a rate of 53.56% meaning Guillermo could possibly expect up to approximately 53% return for his initial investment. As shown in Table 1 with the perspective timeline, based on a period of 10 years, Guillermo Furniture should expect a positive rate of return on his initial investment with reasonable payment options to cover the initial expansion and equipment purchase. Although the broker option is a viable investment with positive returns, as shown on Table 2, the NPV is not as favorable compared to option 1. The profit index for the broker option calculates to 2.84 compared to 3.34 for the high-tech option. This means that for every dollar invested Guillermo returns this percentage based on the initial investment and the current cash inflows per

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