Capital Budgeting Silicon Art, Inc.
Capital Budgeting – Silicon Art, Inc.
University of Phoenix
MBA 540 Week Three
July 14, 2008
Introduction
“Silicon Arts Inc. (SAI) is a manufacturer of digital imaging Integrated Circuits (IC) that are used in digital cameras, DVD players, computers, medical and scientific instrumentation. The major sales are in North America but the company has presence in Europe and South East Asia. SAI grew rapidly in the first years due to the semiconductor industry boom. As the industry began to slow down, SAI watched their revenues fall by 40%. SAI survived the decrease in revenues by cutting costs and freezing capital expenses,” (UoP Simulation, 2008). Now with improved finances, SAI is ready to explore two new projects. By using several valuation techniques, SAI will chose the project that will make good use of the capital budget.
Hal Eichner, SAI Chairman, has two agendas for the company; increase market share, and keep pace with technology. The management team has developed two project proposals to accomplish the company’s goals. The proposals are to expand the Digital Imaging (Dig-image) market share or enter the Wireless Communication (W-Comm) market. The goal is to increase the shareholders’ wealth by selecting the appropriate project. Shareholders like to invest in capital projects that are worth more than they cost. “In capital budgeting, the profitability index measures the “bang (the dollar return) for the buck” invested. Hence, it is useful for capital rationing,” (Ross, 2005). An analysis of the two projects will be evaluated so that the Board of Directors and shareholders may make an informed decision. In order to complete the analysis, the Net Present Value (NPV), Internal Rate of Return (IRR) and the Profitability (PI) will be calculated.
Operating Cash Flow
The first item to consider is the probable future that could affect the cash flows for SAI and from the respective...
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