Risk Analysis On Investment
Risk Analysis on Investment Decisions
When comparing mutually exclusive investments, one must consider the risk associated with his or her choices. In the case of Silicon Arts Incorporated (SAI), the firm is presented with two capital investment proposals from Digital Imaging and Wireless Communications. SAI is looking to grow and must decide whether to accept either of the proposals. In doing so, SAI must consider the risks associated with doing business with either company. Applying valuation techniques and carefully analyzing investment-associated risks will aid SAI in its decision.
One of the evaluated risks was side effects of doing business with either company. Market research reports showed that there was intense competition in the semiconductor market and competitors of Global Digital Imaging were planning to launch new products early in year one. Price wars and new products would result in a decrease in sales at SAI and cause significant erosion (Ross, Westerfield, and Jaffe, 2007). While SAI expects erosion should the organization accept Digital Imaging's proposal, based upon market research, the company predicts synergy with Wireless Communications. Synergy occurs when "a new project increases the cash flows of existing projects" (Ross, Westerfield, and Jaffe, 2007, pg. 180). Market research showed potential for growth and after further analysis, a larger net cash flow then research conducted with Digital Communications.
In further analysis of the presented information, the net present value, internal rate of return, and profitability index were calculated. In cycle one of our decision making, we accounted for projected sales revenue and marketing costs to calculate net cash flows, IRR, and NPV. With Global Digital Imaging, SAI predicted $54 million in year one from the sale of 400,000 units by building a new plant on its existing land. Years two and three would allow SAI to target 20% more revenue with decreases in years four and...
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