Guillermo Furniture Capital Budget Recommendation
Professor Deborah Fitzgerald-Thomas
University of Phoenix
November 08, 2010
Recent changes in the business environments and economy have prompted Guillermo to find different options to invest and stay in business. As a new hire accountant for employer Guillermo Furniture, I have analyzed and differentiate capital budge techniques and recommended best suited course of action. Capital Budget Recommendation
Guillermo Navallez is a handcrafted midgrade and high-end sofas manufacturer, and owns of Guillermo Furniture Company. As a newly hired accountant in this company, I have been asked to differentiate among the various capital budget evaluations techniques, and explain how these different techniques will help make the appropriate recommendation. Capital budgeting is the processes most organizations use to permit authorize capital spending on long-term projects and other projects requiring significant investment of capital. Typically capital budgeting analysis compares cash inflows and cash outflows instead of net income calculated using the accrual basis. Capital projects are typically evaluated using quantitative analysis and qualitative information. There are two capital budget evaluation processes that take into consideration the time value of money Net Present Value (NPV) and the Internal Rate of Return (IRR) (Edmonds, 2007). Time value of money is necessary when comparing possible business investments that have different costs, cash flows, and service lives. Processing a discounted cash flow technique such as the net present value method allows a business to consider the possible cash inflows, cash outflows and the necessary rate of return on the investment before it is considered feasible. When the required rate of return is calculated it changes the discount rate that is used when calculating the net present value of the investment (Edmonds, 2007). When...
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