Capital Budget Recommendation

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Capital Budget Recommendation

Capital Budget Recommendation
Introduction
Guillermo faces a big decision ahead. Not wanting to be acquired by a larger competitor or expand his management responsibilities by acquiring another organization, he had decided to move his company from being primarily a manufacturing company to primarily a distributing company. A competitor in Norway needs channels to distribute in North America and using his existing distributor network Guillermo could become a representative for the manufacturer while retaining some of his high end custom work. In addition, Guillermo has a patented process that creates a flame-retardant for his furniture coating but he will need to buy a separate product for a finish coating.
Capital Budget Evaluation Techniques Guillermo has many evaluation techniques to choose from to make his capital investment decision. He can also combine more than one technique. The following is a description of the techniques he might use. Finding the Net Present Value (NPV) is one evaluation technique. Net Present Value is a comparison of the present value of the future cash inflows to the cost of projectors by subtracting the cost of the investment from the present value of the future cash inflows (Edmonds, et. al., 2007). “A positive net present value indicates the investment will yield a rate of return higher than 12 percent. A negative net present value means the return is less than 12 percent” (Edmonds, et. al., 2007). If the rate of return is higher than the desired rate of return (and more than 12 percent) Guillermo should accept the proposal. The net present value evaluation technique will assist in deciding if purchasing the new machines and robotics will be a good investment. Each proposal can be evaluated in the same manner. The one that produces the highest rate of return should be the proposal…...

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