Risk Analysis On Investment Decision Paper
Risk Analysis on Investment Decision Paper
Silicon Arts Inc. (SAI) is a company that manufactures digital imaging Integrated Circuits (ICs) used in digital cameras, DVD players, computers, and medical and scientific instrumentation. It has presence in North America, Europe, and South East Asia. SAI’s annual sales turnover is $180 million (University of Phoenix, 2008). The purpose of this document is to analyze the risks associated with two capital investment proposals for SAI. The capital investments include expanding the existing digital imaging market share and entering the wireless communication market.
Capital Budgeting
To analyze the risk associated with both capital investment proposals, we will use measures including Net Present Value (NPV), Internal Rate of Return (IRR) and Profitability Index (PI). NPV calculates if a project is worth more than the project cost (Investopedia, 2008). IRR calculates whether the project’s return is higher or lower than the opportunity cost of capital. To measure NPV, IRR, and PI, we will examine assumptions, optimize capital expenditure schedules, and examine cash flows. The proposal with the higher NPV, IRR, and PI values will be the best choice.
External Investment Strategy
Entering into the wireless communication market is an external investment decision for SAI. Industry estimates say that about 25 million mobile handsets will be sold within three years. Approximately 50 percent of the handsets would be data enabled. SAI’s IC 1032 product performed well in pilot tests. To produce the IC 1032 on a commercial scale, SAI must spend approximately $18 million in the first three years and another $16 million in year three (University of Phoenix, 2008). This will give SAI, the ability to produce 4000 units per day. The proposal involves using excess real estate at an existing plant and building a new plant after year 3. Another option for SAI is to enter the wireless communication market...
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