As a result of this, Guillermo realizes that he needs to act quickly or go out of business. The benefits of operating as a sole proprietorship include the fact that Guillermo is able to make decisions without consulting anyone. With this in mind, Guillermo has decided not to merge with other organizations or even to acquire another organization. This led to the consideration of three options – continue as usual; purchase a hi-tech machine; and operate as a broker. However, before any decision can be taken, an analysis of the three options is required. Continuing as usual does not require Guillermo to do anything but to do business in the same manner as before. It is best that Guillermo makes some changes to his current operations. If sales and profits continue to fall then the end result is that the firm would have cease operations. However, with Guillermo’s reluctance to go the way of merger or acquisition closure of the business may be inevitable if the other options are not feasible. Purchasing a hi-tech machine is a very costly option as it requires an outlay of capital. Therefore, Guillermo’s ability to obtain funds as well as the cost of capital has to be a prime consideration. However, there are benefits that can be achieved from going this route. In order to break even, a certain level of sales would have to be achieved. The break-even point is achieved at the minimum level of sales which ensures that the firm neither makes a loss nor a profit. It is a measure of risk that is and s frequently used in making entrepreneurial decisions (Prakash and Deshpande 1982). This is only possible if Guillermo is able to produce furniture at a cost which is lower than the competition. This option of operating as a broker would require Guillermo to become a local distributor for an overseas firm while continuing to manufacture some of the items currently produced. This option will therefore require some changes in the way it has been operating as the main emphasis will be on distribution. This option does not require any capital outlay. An evaluation of the three options will be the focus of this paper. Capital budgeting techniques will be discussed and the very familiar and useful net present value technique will be utilized in order to arrive at a decision. Capital budgeting is the process by which long term capital investments are evaluated (Titman et al., 2011). The value that capital budgeting projects create is its NPV and this is dependent on the cost of capital (Emery et al., 2007). If the cost of capital is high, then the NPV will be relatively low, and if the cost of capital is low, the NPV will be relatively high. Project Evaluation Techniques The main objective of this evaluation is to determine which of the three options available to Guillermo will provide the best return. Some of the techniques that can be used to evaluate projects include the NPV, simple payback, and the internal rate of return (IRR). In making a decision on the feasibility of any project, the cash flows that will arise in future in relation to the initial investment would have to be evaluated (Emory et al., 2007). In the same manner, Titman et al. (2011) indicate that an investment opportunity is valued by evaluating its cash flows. Net Present Value The NPV is the technique that will be used to evaluate the three alternatives available to Guillermo. It is the most preferred capital budgeting technique (Ryan and Ryan, 2002). The primary focus of NPV technique
Guillermo Furniture Store Analysis: Alternatives Available to Guillermo Course Name Introduction Guillermo Furniture Store is a sole proprietorship that is owned and operated by Guillermo Navallez. The firm has been operating as a profitable business for a number of years…
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2 pages (500 words)Research Paper
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