Risk Analysis On Investment Decision
Risk Analysis on Investment Decision
"Silicon Arts, Inc. (SAI) is a four year old company that manufactures digital imaging Integrated Circuits (ICs) that are used in digital cameras, DVD players, computers, and medical and scientific instrumentation" (University of Phoenix, pg. 3). It has presence North American (70% sales), Europe (20% sales), and South East Asia (10% sales). SAI's annual sales turnover is $180 million" (University of Phoenix, pg. 3). In the scenario, the task at hand is to justify using the NPV, IRR, and PI, which proposal to accept. In order to accept the most beneficial proposal, analysis of revenues, expenses, and risks must be performed.
Proposals
The first proposal from Dig-image contends,
"A recent worldwide study has forecasted that the Digital Imaging
semiconductor market will grow 20% in Year 1. The demand will grow
7% annually from Year 2 onwards. By Year 5, new technologies will take
over the market. SAI occupies 18% of the current global Digital Imaging
semiconductor market. It can expand its market share further by increasing
its production base. The Dig-image proposal discusses the details of setting
up a plant in Sunnyvale, CA. It will become functional by end of Year 0. The
Sunnyvale plant will produce the existing range of SAI's Integrated Circuits.
The life of the project is estimated to be five years and it will make 30%
contribution to SAI's annual revenues during this period. In Year 1, the
project is expected to generate revenues worth $54 million (30% of $180
million) through the sale of around 400,000 chips. The capital outlay for
the plant is approximately $40 million. The planned capacity is 10,000
units per day. The cost of capital is taken at 17%" (University of Phoenix,
pg. 5).
The second proposal from W-Comm contends,
"Industry estimates say that about 25 million...
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