Capital Budgeting
Capital Budgeting and Risk Analysis
The purpose of this paper is to discuss the capital budgeting and risk analysis simulation. According to Ross, Westerfield, & Jaffe (2005), capital budgeting is the process of accepting or rejecting projects. It is imperative to analyze capital budgeting investment decisions as a company’s future depends on its growth and revenue. In the simulation, Silicon Arts Incorporated (SAI) produces digital imaging integrated circuits for computers, cameras, DVD players, and medical equipment. They have a significant market in the United States, which generates 70% of their annual sales earnings. Europe and Asia generate the remaining 30%. Recently, revenue for SAI has decreased significantly due to a slowdown in the industry and increased global competition. In order to keep abreast of technology, increase market share, and revenue, the company presented two investment proposals to their Financial Analyst for review. One option is to expand the current digital imaging market and the second option is to expand into the wireless communication area. The risks associated with expanding the digital market is $40 million, intense competition, and decreased profits industry-wide. Entering the wireless market ensures a seven-year life cycle, global competition, and a cost of $34 million, $6 million less than the expansion project. The goal of the simulation was to choose one of the two investment proposals that would generate a higher Net Present Value (NPV), Profitability Index (PI), and Internal Rate of Return (IRR). Net Present Value compares the benefits of a project to its costs. In addition to risk analysis, this paper will discuss valuation techniques related to external and internal investment strategies.
External Investment Strategies
External investment strategies range from mergers and acquisitions, expansion of product lines or markets, to diversification of the company portfolio. Consolidation and...
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