Guillermo Furniture Store Analysis

Guillermo Furniture Store Analysis

Guillermo’s Furniture store enjoyed a strong and robust business throughout the 1990. The owner, Guillermo Navallez lived and made furniture in Sonora, Mexico. In the late 1990 the town started to grow economically and unfortunately a foreign competitor entered the furniture manufacturing market in Sonora. These two changes caused Guillermo’s profits to be cut drastically. With these changes Guillermo is facing a different market and will need to use other alternatives to adapt to the new market. There are a few alternatives Guillermo must consider to make the right decisions for his business as well as contribute to future business models. The alternatives should also be categorized to analyze them as distinct investment projects. The alternatives are; continue with his current process; continue operating the way it has always operated, transition to hi-tech solution; apply high-tech approaches to produce more custom furniture at a lower cost, or become a sole distributor for other organizations and competitors (broker); furniture broker for another company.

To choose the best alternative; the capital budgeting techniques should be applied to each alternative that will determine the most successful of the three and predict and reduce future risks. When making capital budgeting decisions “The objective is to find investment projects that will add value to the firm. These are projects that are worth more to the firm than they cost-projects that have a positive NPV” (Emery, Finnerty, Stowe, 2007). To determine which alternative will be profitable the Net Present Value (NPV) and the Weighted Average Cost of Capital (WACC) will be used.

No Change

In the past Guillermo had success with his business because the area provided a good supply of products needed to produce quality custom furniture. The cost of labor was inexpensive and allowed him to keep high profit margins. The area is progressing with revitalization because a major furniture maker decided to place their manufacturing plant in Sonora (University of Phoenix, 2013). This brought new housing, employment, and vacationers. This increased the cost of labor and the risk of heightened competition with big name companies. The organization saw profit margins fall and operational costs and labor increase. If the company continues this route, they would need to find ways to keep costs of production low with a smart method of using labor times to keep profit margins high or at a desired level. Based on the income information, out of the three alternatives, this decision would bring about a higher amount of required labor costs and lower production numbers. The amount paid in benefits is the highest in this alternative because the organization will have a workforce that will require benefits. There is a low amount of depreciation because they are using their