Guillermo Furniture Store Analysis: Different Alternatives Available - Case Study Example

Download file to see previous pages As indicated in the case investing in robots and expanding the production facility is a very capital intensive exercise and therefore the volume required to make the project feasible is very important.
Guillermo is currently producing 2,532 units of the Mid-Grade furniture and 506 units of the High-End furniture. If he goes hi-tech he can increase both by 50% to 3798 units of Mid-Grade and 759 units of High-End. Producing is one challenge but getting the items sold is another challenge.

Sensitivity analysis performed using the information in the spreadsheet indicates that this project will not yield any positive returns (when combined with the current high-End operations) if production levels are not at least 14.2% above current levels. At 14.2% above current levels, Guillermo would be producing 2892 units of Mid-Grade and 578 units of High-End furniture. See Appendix 1 for results.

Another option open to Guillermo is to become a distributor in North America for a Norwegian company. This project will involve an expansion in the facility to accommodate the increased production. It will also involve the use of robots.

Sensitivity analysis using the information given in the excel spreadsheet indicates that Guillermo would not be able to yield any profits on being a Broker if the level of sales is not at least 38.3% above current production levels. See Appendix 1 for details. Therefore, this project will not be able to withstand any large fluctuations in demand.

Emery et al (2007) state that: “when making capital budgeting decisions, a firm evaluates the expected future cash flows in relation to the required initial investment. The objective is to find investment projects that will add value to the firm.” The role of management is to analyze each option to determine which method would result in more profits and therefore yield more benefits for the company. There are a number of techniques available to determine which project is more feasible. These techniques include payback period, accounting rate of return (ARR), net present values (NPV), and internal rate of return (IRR). ...Download file to see next pagesRead More