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Guillermo will have to conduct a sensitivity analysis and compute net present value of his company, in relation to the application of the alternatives. According to Emery, Finnerty and Stowe (2009), sensitivity analysis determines how sensitive the business is to variations of the different parameters in the business such as fixed and variable cost. Guillermo will have to determine how his business will be affected to changes in capital, fixed and variable costs and how these changes will affect sales and profit. To determine the sensitivity of the business, we will have to discuss and calculate the net present value of money (NPV), the weighted average cost of capital, and the internal rate of return. Before making any investment decision, it is important for the investor to consider that each asset has its own, ¡°unique value, required return also known as the cost of capital and expected return¡± (Emery, Finnerty, & Stowe, 2009. P. 190).
Selecting the right capital project and making correct financial decisions is based on the formula, whereas the value of the firm equals the total market value of its equity plus the total market value of its liabilities (Emery et al., 2009). Guillermo evaluated and conducted financial analysis on each capital project. The first capital project is to increase manufacturing capacity by acquiring a smaller organization. Guillermo considered this project because of the likelihood of maximum returns and minimum risks. The negatives for this...