Risk Analysis
Running head: Risk Analysis on Investment Decision
Capital budgeting is determining which potential long-term projects are worth undertaking, by comparing the firm's expected discounted cash flows with their internal rates of return. Net present value (NPV), internal rate of return (IRR), discounted cash flow and payback period are popular methods of capital budgeting. Capital budgeting is involved in the justification of capital expenditures (Investorwords, 2007). Capital budgeting is a process that Lester Electronics had to deal with.
In Lester's decision to be involved in an acquisition with Shang-Wa, LEI faces several financial risks that need to be mitigated. Asset quality issues in which a company has a weak loan portfolio and can drain the financial status of the acquiring company. These problems can dimish the liquidity inherent in the loan portfolio. Poor asset quality is a reflection upon management's competence, or lack thereof (Insights for Bank Directors, 2004). Another risk that a company can encounter is lack of compliance. Lack of compliance refers to violation or misuse of tax laws which can cost the acquiring company fees and fines, regardless of when these laws were violated / misused. When acquiring another company, the risk that is out in the open is the company's debt ratio and current expenses. Lester Electronics faces this risk which can decrease the value of the company and in turn cause negative NPV. Regardless, when acquiring a company, the research should be in place to determine how the risks can be mitigated and make the proper investment decision.
Risk management is the process of prioritizing where the risks with the greatest loss and the greatest probability of occurring are dealt with first, and the risks with lower probability of occurrence and lower loss are handled with lesser priority. Two types of risk management that can be easily applied or associated with Lester Electronics...
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