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Financial Analysis

Financial Analysis

Introduction

Guillermo Furniture Store has mainly three financing alternatives either they can evolve with a broker or can go with some investment firm for this paper it is (High Noon Investment). Through different alternatives the store needs to evaluate the decision. For this project the store needs to highlight the integration with capital budgeting in order to evaluate different techniques.

Guillermo Navallez is involved in designing furniture for quite couple of years. The manufacturing facility has splendid supply of timber which helps in lowering down the production cost. On the other hand the labor is also cheap. The paper analyzes different techniques for sensitivity analysis.

These capital budgeting techniques are:

Payback

Discounted Payback

(NPV) Net present Value

(IRR) Internal Rate Of Return

Payback period can be defined as the period in which a company can earn back his investments on a project. It is the most important thing while analyzing an investment i.e. how much time did the store needs to reimburse their invested money, for example if the amount they invested is \$ 300 million. The cash flow of Furniture store at time = 0 is equal to the initial investment of -\$ 300,000 as well as the Year 1 cash flow of \$ 500: -\$ 300,000 + \$ 42,573=-\$ 257,427. On the other hand, the Year 2 is the cash flow is of -\$ 257,427 plus the Year 2 inflow of \$ 42,573, resulting in -\$ 214,854. (Balance Sheets and Income Statements are attached). If the \$ 40,584 are the 3 rd year CF's, then the calculation of expected cash flow can be analyzed as:

According to the financial analysts if the payback period of a company is shorter it is good for the investors to jump in because it starts generating profits as it fulfills its cost. If two projects are analyzed upon the payback the shorter period would be selected as the best option. Mutually exclusive would also be rejected (Brigham, 2004)

Discounted Payback Period

Nowadays firms are using discounted payback and are preferred on payback period. Therefore it includes the cash flow stream while deciding on cash the investment recovery period.

If we analyze and distinguish both the projects we would find out the fact that the discounted investment recovery period for the project is 9 years and 8 months (9.8). On the other hand the project proposed by Broker has a time period of 8.1 years and the high noon investment is 1.4 years.

Payback Vs Discounted Payback

The biggest dilemma after analyzing the calculations of both the projects is that they ignore cash flows which are recovered from the operation during the period of payback. Let's take an example that High Noon investment has an addition CF at the end of 5th year and the method has completely ignored its values as well as its impact this is the major drawback.

In order to conclude the decision there is only a single disadvantage of this method that is it ignores the cash flows during the period of ...
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