This paper shall analyze on capital budget of Guillermo furniture store which is a furniture manufacturing company which is located in North America. The company is placed in areas which it has access to supply of timber for its use to manufacture furniture and it also have access to cheap labor. However the company had been faced with stiff competition which is encroaching, its market. The competitors have better products because they are providing the furniture’s at the exact specifications and they were much cheaper as compared to Guillermo’s. Then the cost of labor increased which made the profit of Guillermo to shrink
While, Weighted Average Cost of Capital (WACC) is a rate which is expressed in percentage which a company is expected to pay to its debt holders. It represents the minimum return which Guillermo should earn based on the existing assets to be able to satisfy its creditors. WACC is used to measure the capital discount for the firms spending and gaining (Kenton, 2006). However, Guillermo is spending more than what they are gaining from sales which has resulted them to record a decline on the profit which they are realizing.
In conclusion if the net present value is equals to zero the investment would neither gain nor lose the value of the company and it is advisable to reject the project because it will engage the management of the company in its design, implementation and investment of which it will not add value to the company (Grier & Nagalingam 2000). It would be much better to utilize the resource and time which would have been used in the project much more meaningful to add value to the company.
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