Justifying Adoption of Hi-Tech Solution
Implementation Requirements & Capital Outlay
According to Guillermo’s sales forecast, if Guillermo selects hi-tech solution, its production can be increased by 50% and prices are reduced by 10% because supply is increased. Guillermo needs to add $45,000 a year maintenance position for the equipment and utilities are expected to be 3 times’ current at full production (150% above current levels) based on units produced by adopting hi-tech solution and expanding their business.
Insurance will increase by 12,000 with the addition of the equipment and building expansion. Also, property taxes are 6.5%, assessment is 1% of original value, and that is on all plant and equipment (Guillermo Furniture, 2009).
Hi-Tech reflects $500,000 increase in capital expenditure for building and $4 million increase in capital expenditure for its equipment. Accounts payable represents two month of purchases and one month of bills and property tax, furthermore all timing issues wash out for simplicity. We recommend Guillermo to use equity financing to attain $4.5 million capital outlay and those amount of funds can be fulfilled by the issuance of $4.5 million of additional shares.
Analysis of NPV, Cash Flow, & Profitability of Hi-Tech
The NPV (Net Present Value) measures the value the project will create, which is the difference between what the project is worth and what it will cost to undertake (Emery, Finnerty, & Stowe, 2007, p.234). NPV is used in capital budgeting to analyze the profitability of an investment or project. NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account (Investopedia, 2010). NPV of future cash flows for Hi-tech for one year is $518,118.93 when WACC (Weighted average cost of capital) is 10.47%. The NPV of hi-tech is 28% higher than current strategy (NPV is $45,033.86 and WACC is 5.74%) and 51% higher than becoming a broker (NPV is...