Mba 540 Risk Analysis
Running head: RISK ANALYSIS ON INVESTMENT DECISION PAPER
Risk Analysis on Investment Decision Paper
Mia Randle
University of Phoenix
MBA/540 - Maximizing Shareholder Wealth Allan
Paul Updike: Instructor
July 5, 2008
The Silicon Arts Incorporated (SAI) simulation provides an opportunity to examine the financial implications of managerial decision making and capital budgeting. Silicon Arts manufactures digital imaging integrated circuits used in digital cameras, DVD players, computers, and medical and scientific instrumentation throughout South East Asia, Europe and North America. SAI must determine which of two capital investment proposals, expanding the existing digital imaging market share or entering into the wireless communication market, must be undertaken to increase SAI’s annual sales turnover of $180 million. The profitability index, net present value, and internal rate of return will be reviewed to determine the appropriate project to undertake. The profitability index, an index that attempts to identify the relationship between the costs and benefits of a proposed project is determined by dividing the present value of future cash flows by the initial investment. Values lower than 1.0 are considered unacceptable and because they are less than the initial investment indicating a less then attractive investment. Net Present Value is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project. NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield. NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should...
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