In determining the viability of a strategic investment, several pieces of information are required, including the cost of the project, the projected cash flows, and the discount, or interest, rate. In the Guillermo Furniture Scenario, which costs would you NOT consider, and why? Are there also certain non-financial factors that would impact your decision for Guillermo? Additionally, think about today's economy. Would the discount rate to be used in the time value of money calculations for Guillermo likely be higher or lower than it was eight years ago? Why?
To determine the viability of a strategic investment in the Guillermo Furniture Scenario, there are several costs that should not be considered:
1. Sunk costs: These are costs that have already been incurred and cannot be recovered. They are irrelevant to the decision-making process as they cannot be changed or influenced by the investment decision.
2. Opportunity costs: These costs represent the potential benefits foregone by choosing one investment option over another. While they are important in the overall decision-making process, they are not considered in the specific calculation of a project's viability.
In addition to financial considerations, there are non-financial factors that may impact the decision for Guillermo Furniture:
1. Market trends and competition: Guillermo should take into account the current market conditions and competition in the furniture industry. This includes analyzing customer preferences, market demand, and the competitive landscape to assess the feasibility and potential success of the investment.
2. Technological advancements: Guillermo should consider technological advancements in the industry. New technologies, such as automation or advanced manufacturing techniques, could impact the cost structure, efficiency, and competitiveness of the investment.
Considering today's economy, the discount rate used in time value of money calculations for Guillermo is likely to be lower than it was eight years ago. This is because the discount rate is typically linked to the prevailing interest rates in the economy. If interest rates have decreased over the last eight years, the discount rate used to calculate the present value of future cash flows would also be lower. A lower discount rate increases the present value of future cash flows and makes the investment more attractive. However, it's important to note that specific economic factors and circumstances should be carefully evaluated to determine the appropriate discount rate in the Guillermo Furniture Scenario.