July 23, 2012
To sustain further improvements to a company’s bottom line and profitability, Guillermo’s Furniture is completing a pro-forma cash flow analysis that includes net present value (NPV), internal rate return (IRR), and weighted average cost control (WACC) analysis’. The plan is to incorporate a merger of a high tech furniture business, a broker distributer business, or the status quo manufacturing. The issues driving these analysis decisions are the facts that a company located in Sonora Mexico relying on inexpensive labor conditions threatened from third party competition. This in of itself is driving up labor costs. The analysis took in the concept of increasing NPV to its highest levels where the broker distributorship is the ranking of choice in the decision to move forward.
Guillermo's Furniture Store ProForma Analysis
In a sleepy little town on Sonora Mexico, Guillermo Furniture being two years old is at a decision step to take on additional productivity as the international competitive pressures build up. The pro-forma cash flow analysis will look at three functions, with no change to the current operation, furniture based high tech company, and the company as furniture based distributor/broker. Even though following the financial principles to perfection, properly run Guillermo Furniture organization achieves profitability because of looking to analysis that sees a decision based on the status quo, innovating to a High-Tech production, or to a distributorship. The tree levels of analysis include a corporate weighted average cost control analysis (WACC), a net present value analysis (NPV), and a complete ProForma analysis where all the areas relevant to the company achieving its daily goals are computed and shown in the attached forms in tables one through three. Additionally, a weighted average cost of capital analysis will give a lower rating to decrease risk. Lastly an analysis that looks at probable maximum loss (PML) as a function of NPV, the risk can be apportioned to an internal rate of return (IRR) being greater than WACC and seeking to outpace PML. Maquiladoras American labor infusions into Sonora area of Mexico are driving the costs of labor up. Authors found that “…. we analyze the impact of the Corporate Flat Rate Tax on a Maquiladora or manufacturing company in Mexico. The results show no impact on liquidity due to this new tax” (Cisneros, Teran, Lopez, Carriolo, 2012, p1). With this, a conclusion infers that the flat tax rate creates an infusion into the Mexican corridor as corporate rates are important. However Guillermo Furniture has a high tax rate compared to American counterparts and a higher rate than the rest of the world. A move to an area such as the Maquiladoras and enjoying favorable tax status will create an even better outcome even in light of the labor costs increasing. Commissioning this move, the following analysis makes the case for one decision tree. Status Quo
Navallez faces tough financial decision to make. It looks like the store owner and its board of directors may want to make some adjustment if they want to continue making money or stay in business. The biggest obstacle the owner faces is to overcome the self-interested behavior (Emery, Finnerty, & Stowe, 2007), and choose what is right for the business, especially with tough competitors. In general any company that has a monopoly in the city or neighborhood will impose its prices to its customers. Guillermo’s Furniture Store was not making the exception, we can quote what the scenario says," he priced his handcrafted products at a slight premium for the quality they represented” (Guillermo’s Furniture Store Scenario, UOPX website, 2012). Since Guillermo furniture store faces competition from rival furniture stores, Team A believes that he cannot he afford to continue doing the same thing and still be...