Guillermo Financial Analysis Essay

Making a sound financial decision is a bouncy comp anent of the success of a business. The business mustiness conduct market research, description of products, services and marketing strategies, and setting principles for the businesss success. Expenses should be noted prior to writing a financial plan. The goal of a business is to operate on a predefined budget. Ensure there are no undefined or hidden cost that could cause problems later. The business plan serve wells the business to give rise day-to-day decisions on its operations.TeamD exit analysis Guillermos alternatives and make a recomm conclusionation on which alternative go out enhance the businesses financial decision. Maintain Current Operational Levels one(a) preference available to Guillermo is to make no adjustments to the companys current operations. This option supports the top concerns of acquisition from a larger firm and spending a large amount of money on high-tech equipment coronations, it does not so lve the problem of a shrinking put on margin because of a rise in labor cost.Supporting the option to maintain current operations overlooks potential opportunities that are identified to altogetherow the company to move away from its primary manufacturing role and act as a distributor for the Norwegian competitor. According to the assets, liabilities, and equity information provided by the University of Phoenix, sales step-up is slowing to 1% from previous point in times. These low profit margins pull up stakesnot sustain Guillermo in the long-termthey give not improve if there is not a choicemade to adjust to the financial situation. Maintaining current operations does not address the shrinking profit margins.To continue to move Guillermo furniture in a positive direction, Mr. Navallez needs to apply some options already available and within the current operating structure. One option available to Guillermo is expanding the patented flame retardant process already in use with in the manufacturing process, by applying a similar coating. This option requires no additional investment because Guillermo owns the equipment as part of the existing manufacturing process. The new coating adds revalue to the furniture, and makes it more appealing to consumers (University of Phoenix, 2009).The net present value of the project must be calculated in order todetermine ifthis is a strong option. For planning and budgeting purposes, a three-year life cycle is assumed for the coating project with an initial investment cost of $222,705 that is absorbed during the first year of the project. This produces a projected change flow of $1,733,562, leaving Guillermo with a net income profit of $42,557. Net present value for the three-year project calculates to $197,171. Another option available and immediately implemented is to reduce inventory by quickly turning over products, thus increasing the cash flow.Planning an unblemished budget supports the inventory overhead by red ucing costs associated with maintaining inventory. The flex budget data shows that Guillermo furniture underestimated June operating expenses by $101,740. If these costs estimates were more closely tied to production costs, a substantial amount of cash would have been available to reinvest in other areas of the business. Closely managing this inventory will make more cash available for expansion in other areas of the company. Last year Guillermo experienced a $3,671 growing in its year-end inventory. keeping a large amount of inventory on hand ties up cash, which otherwise can be investedin other areas of the business. Guillermos option to hold sporting and maintain current course is setting the originators for failure. However, to maintain its current course and improve its financial standing, Mr. Navallez can leverage small opportunities that maximize the financial condition by leveraging the existing patent and reducing inventory. High Tech Business Upgrade Guillermos high tec h alternative is based complete a process currently being used by one of the Norwegian competitors.It will allow the business to increase productivity but will also require a more skilled worker to operate the machinery. In choosing this alternative it predicts that sales will increase by 50% saving in an increased revenue stream (University of Phoenix, 2009). In assessing this alternative looking at the net present value of future cash flows will help make this decision an easier one by noting the value it brings to the organization. Assuming that Guillermo expects to see a return on the investment within three years, this time period will be used in calculating the NPV.Using the three year time period with an interest rate of 7. 5% and a growth rate of sales at 1. 0403% the NPV can be calculated at $617,178. The firms predictions on projected sales has not been the most accurate when looking at historical information. Conducting a sensitivity analysis will further help to determ ine the value of this alternative using the net income as the adjusted variable. Assuming there will be a surmount, lash, and most likely outcome to future sales revenue, the projected sales number of $195,564 will act as the most likely outcome.By increasing this number by 10% and decreasing it by 10%, the best case and worst case scenarios can also be calculated respectively. These numbers will show how sensitive the NPV calculations are to the changes in net income. Under the best good deal high tech alternative yields a net income of $215. 120 while the worst yields $176,008. These numbers translate into net present values of $617,486 under the best circumstances and $616,870 under the worse circumstances. If Guillermo decides to use the alternative funding for the expensive machinery becomes an issue.There are three main ways in which to fund the corrupt of this equipment and the additional cost of employee labor. The additional costs can be self-funded if the available cas h is available. This will increase the equity in the firm but this will also reduce the leverage the company currently enjoys. The companys equity can be used to purchase the equipment. This will have the selfsame(prenominal) effect as if Guillermo used personal funds since he is the sole owner of the furniture company. The equipment can be financed through secured debt financing which will increase leverage as well as provide additional tax benefits to the organization.And lastly, Guillermo can lease the equipment. Each of these alternatives provides unique tax benefits as well as pros and cons specific to each of these options. As Guillermo encounters this alternative in comparison to other options the cost of maintenance, salvage costs, depreciation costs, and increased labor costs should be factored. These all impact the overall capital budgeting decision faced by Guillermo Furniture. Distribution/Broker Opportunities Guillermos second alternative is to become a broker for one of the Norwegian competitors.The company has been looking for channels to distribute in North America as it has chosen not to operate furniture outlets but sooner to rely solely on chain distribution (University of Phoenix, 2009). Guillermos existing business relationships afford him the opportunity to coordinate a distributor network that generates a new form of revenue for the company. This new stream of income can help offset some of the financial challenges that have emerged as a result of a competitive furniture market and increasing costs.In addition to becoming a broker, Guillermo can also continue offering some of his high end custom products. To determine if becoming a broker is the best option, Guillermo will evaluate the NPV and WACC for the proposed project. To calculate the NPV, Guillermo must consider the investment time period and the give the axe rate. In this case, Guillermo will review a period of 20 years. When calculating, the need to remove the income tax fro m the net profit and then re-add the depreciation back in. Next, consider the value of the companys equipment.For the purpose of this paper, it will be assumed at $100,000,000 with a straight-lined depreciation of $100,000 yearly, over a 10 year period. one time the ten years is complete, the before tax income will increase for the broker option by $100,000. The cash flow will be reduced by 42% since Guillermo will have to pay the taxes on the increase. Since the building will be completely depreciated after 17 years, the net income before taxes will be $50,000. The net present value for the broker option over the 20 year period at 10% will be $4,125,109. 02.