Guillermo_Furniture_Store_Analysis

Guillermo Furniture Store Analysis Hugo Haro FIN 571 May 11, 2012 Jeremy Alessandro Guillermo Furniture Store Analysis The furniture industry can be profitable at times but also can be costly when opportunities arise and are not managed wisely. For instance, in Guillermo’s case, several opportunities have risen and his company has the opportunity to move his company in other directions, such as staying in the current furniture production but making several changes, or becoming a broker in the industry, or just sell his assets and exit the industry altogether. Guillermo can also diversify his current business with the opportunities available into a portfolio. Diversifying his current business into a well managed portfolio can dampen any swing in a particular area of the furniture industry like a sudden decrease of retardant sales but an increase in broker distributorship business. Introduction In this report the author will consider three possible alternatives for Guillermo’s Furniture Store and make recommendations on what would be best suitable for Guillermo’s company. The Guillermo Furniture Company has been a staple in Sonora, Mexico for a long time. Guillermo’s furniture has maintained a respectable capital budget history but realizes that changes will be made to become more competitive. First he will need to improvise his capital budget, sales forecast, and analysis of his business, to include his operations and the effects of economic trends within and out of the furniture industry. For instance, housing, and consumer confidence can have a big impact in what people will buy or intend to buy some time in the near future. Guillermo’s Capital Budget at a Glance After further review of Guillermo’s capital, the recent economic trend has proved to be a struggle for Guillermo’s furniture business because of several factors affecting his revenue. For instance, new competitors with better technology and making furniture on demand, increased labor cost, and higher product material costs to start. These are just a few significant unfavorable variances that affect Guillermo’s total operating costs. For Guillermo to return to an acceptable profitability state, Guillermo must develop a cost-effective alternative and determine the best option. For instance, lower total operating costs, re-evaluate Guillermo’s furniture manufacturing process, such as using technology to increase output, and decrease cost. Alternative 1: Technological Equipment Upgrade Guillermo decided to do a little research on the competition and what he essentially realized was that they were highly automated. For instance, a plant in Norway used minimal labor because automated machinery was used for many of the assembly functions 24/7. Furthermore, Guillermo noticed that these machines were extremely precise when cutting materials that meant less raw material costs in the long term. However, the drawback to go with automated equipment was the cost of the technology. In any case, even though converting the company from manual to automation would be expensive, he saw how he could use this alternative to cut total costs dramatically (Guillermo Furniture Store Scenario, 2012). For instance, the one-way sensitivity analysis is used to determine the effectiveness of a recent change or parameters like automation equipment replacement. For this reason, Guillermo could purchase the automated machinery with an initial investment of $100,000, and a projected cash flow evaluation to be re-evaluated every five years. In addition, another way to reduce initial investment, old equipment being replaced can be re-sold and cash revenue gained could be re-invested. The net present value is as follows $33,696.61 with a required rate of return of 6% and a modified rate of 17%. The total projected cash flow at end of five years is $158,000 (See figure 1). Figure 1. Technological Equipment Upgrade Initial Investment 100,000 Year 0 -100,000 1 55,000 Required rate of Return 6% 2 26,000 NPV $33,696.61 3 22,000 IRR 20% 4 25,000 MIRR 17% 5 30,000 158,000 Alternative 2: Marketing Distributorship Another option available for Guillermo to diversify his business is becoming a distributor. Guillermo understood that this could be an opportunity to become the primary distributors in a region because of his existing distributorship network. The required investment capital for becoming a distributor is usually minimal. For instance, it is projected that Guillermo’s initial investment would be $25,000 with a net present value of $58,775.71, a rate of return of 10%, and a modified rate of return of 55%. The projected cash flow in a five-year period would be $115,000. This option for Guillermo can turn out to be the most profitable because of its minimal investment, high profit returns and opportunities for growth in other areas of the distribution business (See figure 2). Figure 2. Distributorship Initial Investment 25,000 Year 0 25,000 1 25,000 Required rate of Return 10% 2 35,000 NPV $58,775.71 3 20,000 IRR 102% 4 20,000 MIRR 55% 5 15,000 115,000 Alternative 3: Patent of Flame Retardant Another Alternative available for Guillermo is his patented flame retardant coating that has exceptional market value in the furniture business industry. Although demand is not high for Guillermo’s patented coating process, there is a market for the flame retardant. Guillermo will need to consider in investing in the flame retardant process so that by combining these two processes will help Guillermo separate his business from his competitors. This will make Guillermo’s patented coating and flame retardant process much more profitable. It is believed after a projected analysis that Guillermo will need to make a minimum investment of $35,000, at a rate of return of 8%; his internal rate of return is projected at 43% with a modified rate of return of 29%. The projected cash flow in the next five years will be about $92,000 (See figure 3). Figure 3. Patent and Marketability of Flame Retardant Initial Investment 35,000 Year 0 -35,000 1 16,000 Required rate of Return 8% 2 22,000 NPV $35,489.52 3 16,000 IRR 43% 4 20,000 MIRR 29% 5 18,000 1 92,000 Conclusion In conclusion, looking over, and analyzing Guillermo’s Furniture possible alternatives it is in Guillermo’s best interest to make the best decision that will provide continued success. Remaining competitive in the industry is Guillermo’s primary objective followed by a satisfactory budget. In any case, each alternative has a satisfactory rate of return on investment but based on the analysis and projected cash flows, it is recommended that Guillermo’s best alternative is to consider moving in the direction of automation. Although initially it is a large investment, the rate of return is greater. Then again, developing a second alternative is not a bad idea either for Guillermo. It is recommended that he considers the distributorship market because of his current network within the furniture industry. This can be an advantage and beneficial to Guillermo when considering the rate of return on investment. References Horngren, Sundern, Stratton, Burghstaler., 2008 Introduction to Management Accounting. Prentice Hall, Saddle Brook, New Jersey. Guillermo Furniture Store Scenario, (2009) Retrieved on May 11, 2012 from http://www.ecampus.phoenix.edu Taylor, M. (2009, April). What is a Sensitivity Analysis. Sanofi-Aventis.