Free Custom «Furniture Store» Essay Paper

Guillermo’s Furniture Store intends to increase to increase revenue by reducing prices of both mid-grade and high end by 10 percent. The management increased the level of production of both mid-grade and high end to meet the anticipated increase in demand. The increase in production capacity necessitated an increase in salaries due equipment maintenance. From the effected changes, led to the projected net present value for option A for the 10 years decrease from $624,047 to $65,979 as illustrated in the excel spreadsheet. Therefore, from the sensitivity analysis, it will be prudent for Guillermo’s Furniture Store to remain on the current level of production and prices (Saltelli & Scott, 2008).

Scenario B

If the Guillermo’s Furniture Store decides to follow the scenario B, it will cost the company an initial outlay of $4,166,666 for equipment. The company earns a stream of cashflows coupled with depreciation that sums up to $591,099. Therefore, the most likely NPV of the scenario will be high compared to that of scenario A. If Guillermo’s Furniture Store decides to increase revenues by reducing prices of both mid-grade and high end by 10%, the company will experience a decrease in the streams of cashflows and hence to the overall NPV. The decrease in the NPV will result from the increase in the salaries due to equipment maintenance (Saltelli & Scott, 2008). Since NPV is usually calculated from the difference between the cash inflows and cash outflows, the company will have to take into consideration the 10 year projection plan, and the cost of capital of 4%. Therefore, from the sensitivity analysis, it will be prudent for Guillermo’s Furniture Store to remain on the current level of production of and prices so as to reduce the effect of the initial cash outlay required.

 

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Scenario C

If the Guillermo’s Furniture Store decides to follow the scenario B, it will cost the company an initial outlay of $0. The current cash inflow of Guillermo’s Furniture Store is negative. This depicts that the company policies at the moment are not prudent at all. From the estimation of the data available, the NPV will be negative. Companies rarely work with negative NPV since they imply that the project does not yield any returns at all (Saltelli & Scott, 2008). Guillermo’s Furniture Store’s choice of reducing the prices and increasing production will have a positive impact on the level revenue as well as the cash inflows. If Guillermo’s Furniture Store decides to increase revenues by reducing prices of both mid-grade and high end by 10%, the company will experience a increase in the streams of cashflows and hence an increase in the overall NPV. Therefore, from the sensitivity analysis, it will be prudent for Guillermo’s Furniture Store to change the current level of production of and pricing system.

Analysis of the Three Scenarios

Scenarios A and C do not require any initial investment whereas investment B requires an initial investment of $4,166,666 for equipment. Scenario A and B will therefore be better alternatives because there is no need to source for funds neither will there be interest costs and opportunity costs incurred due to capital investments (Saltelli & Scott, 2008). Scenario A will have the highest net present value. Therefore, Guillermo’s Furniture Store should select Scenario A to maximize investor’s wealth. The $4,166,666 that would have been invested in equipment can be invested in interest bearing securities to increase profits.