Capital Budgeting
Abstract
This paper discusses measures like IRR (Internal Rate of Return), PI (Profitability Index), and NPV (Net Present Value) and how they relate to Silicon Arts, Inc. for their capital budgeting with the purpose of comparing two mutually exclusive investment proposals. Before the final decision was made as to which investment was viable, capital budgeting was completed and prepared cash flow projections were prepared to arrive at the final IRR, NPV and PI values.
Capital Budgeting Simulation
Silicon Arts, Inc. (SAI) is a four year old company that manufactures digital imaging integrated circuits (ICs) that are used in DVD players, digital cameras, medical scientific instrumentation, and computers. It has 70% of its sales within North America, 10% of its sales in South East Asia, and 20% of its sales are in Europe. SAI’s annual sales are around $180 million. SAI grew by 78% in 2000 due the fast-paced semi-conductor industry growth. In 2001, SAI sales fell 40% due to the industry slowing down. When this happened SAI decided to reduce its costs and place a hold on capital expenses. Even with the falling revenues, SAI wanted to continue its research and development and created the IC-1032 which is a specialized chip placed into mobile phones and when SAI did its product testing, the chip tested quite well. Near the end of 2001, the momentum of the industry picked up again and SAI had strong revenue growth in its last two quarters. This allowed the company to pursue its growth agendas (UOP, 2002).
In order for SAI to begin to look at their agendas for growth, capital budgeting needs to be performed. There are two proposals that have been presented for consideration. One is the Dig-Image proposal and the other is the W-Comm proposal. A recent study (worldwide) has forecasted that the digital imaging semiconductor market will grow 20% in the first year. The expected demand will grow 7% each year after. The estimate is...
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