Capital Budgeting Recommendation for Guillermo Furniture

In: Business and Management

Submitted By lkeller5827
Words 1044
Pages 5
Capital Budget Recommendation for Guillermo
Lynda D. Keller
June 23, 2014
Richard Collins

Capital Budget Recommendation for Guillermo
The first and most necessary goal of any organization is to maximize shareholder wealth. Maximizing shareholder wealth includes identifying and analyzing future projects that can provide value. Typically in a risk-return trade off the greater the risk, the higher the return. According to Krenz and Miller, “organizations undertake risky directions when the outcomes are so desirable that the probability of failure makes it worthwhile,” (Krenz & Miller, 2011, p. 18). Guillermo’s Furniture Store is facing increased competition, especially through consolidation of competitors.
One option for Guillermo is to upgrade to current technology. This option is costly but can result in a substantial decrease in labor cost. Another option for Guillermo is to change the focus of his business from manufacturing to distribution using his existing distributor network.
Keeping in mind that the main goal in capital budgeting is maximizing shareholder wealth managers will need to determine which projects will need to determine which projects will bring the largest return for the least amount of investment. In evaluating projects, there are many capital budgeting tools available to managers. These tools include net present value, weighted average cost of capital, and internal rate of return. According to a Duke University study, “75% of the participating chief financial officers (CFO’s) use net present value and internal rate return in capital budgeting,” (IOMA, 2003, p. 2).

(IOMA, 2003)
Net Present Value
Net present value is the difference between the present value of cost of the project and the present value of the cash inflows. The calculation uses projections of cost and cash inflow, and an assumption about the discount…...

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