Guillermo Furniture Store Recommendation - Essay Example

High tech solution is already a part of the production process of Guillermo competitor. This technology has high level of automation that reduces the labor requirement from production process and even from movement of products across assembly line. High tech solution also has computer controlled laser lathe that gives exactly the required cut on the product, thus reducing wastage. JUSTIFICATION FOR RECOMMENDATION  Cost Benefit Adoption of high tech solution would benefit Guillermo in many areas.

First, Guillermo would be able to reduce price of its products. Reduction in price is the most effective tool in meeting competition. Investment in this high tech solution will increase its production by considerable size of almost 50 percent in the first year to enhance its capacity of meeting market demand and compete with foreign competitor with increase in its supply at reduced cost and prices.. Increase in production would spread the cost over greater number of units. The overall labor cost of the business would increase as labor with high technical skills will be required.

However, the production time or labor time for both mid grade and high end products will decline from 20 to 4 units for mid grade and 30 to 4 units for high end products. This decrease in per unit means that almost 5 additional units of high end product (4 X 5 = 20) and 7 additional units of mid grade (4 X 7 = 28) can be produced in time that would have required preparing single unit of both categories under current production process. With adaptation of new technology, the firm will be able to make gross profit of $.

891, 543 as compared to $.265, and 282 with current process. Increased Net Profit Adoption of high tech process would increase overhead cost from $222,705 to $. 696,979. This increase in overhead cost is due to increase in cost of salaries, insurance, property tax and depreciation. However, even with accelerated increase in overhead, firm will be able to make net profit (before taxes) of $.195, 564 from $.42, 577. This is the most attractive benefit that Guillermo is expected to gain from changing its business model to high tech solution.

Investment Appraisal Technique With these benefits, high tech solution for business is highly capital intensive. Guillermo would require considerable amount to finance this new tech solution for its business. Guillermo Balance sheet for 2010 and 2011 provides information regarding its financial position. Among two modes of financing which are debt and equity, it is suggested that Guillermo shall opt for equity mode of financing. WACC for 2010 and 2011 has been 5.54% and 5.57% respectively with debt contributing 84.3% and 82.4% respectively for two years.

Hence, the share of equity is only 15.7% and 17.5% for two years in line. In case, Guillermo adopts debt mode of financing it will then further increase the debt component of WACC which is already too high. WACC is the weighted average cost of capital and it shows the average capital cost of the company (Brigham, & Houston, 2004). Hence, it shall raise funds through equity. Cost of capital reduces if the company has too much debt in its capital structure and then it reduces its debt by increasing the equity (Emery, Finnerty, & Stowe, 2007). Therefore