Risk Analysis on Investment Decision
In Capital Budgeting Simulation, Net Present Value (NPV), Internal Rate of Return (IRR), Profitability Index (PI), and Weighted Average Cost of Capital (WACC) can be analyzed two mutually exclusive capital investment proposals. Silicon Arts Inc. (SAI) is a four-year-old company, manufactures digital imaging integrated Circuits (ICs) that need to analyze two capital investment proposals to pursue its growth plans. “SAI’s Chairman is planning to increase market share and keep pace with technology, which can be done by either expanding the existing Digital Imaging market share or entering the Wireless Communication market.” (Simulation, UOP). An analysis reveals that an expansion into the Wireless communication can be beneficial than Dig-Image. However, a number of risks, internal and external are inherent in joining this industry. This paper will analyze investment risk decisions and mitigation of risks by using a number of strategies.
“Net present value (NPV) of the investment is the present value of future cash flows minus the present value of the cost of the investment” (Ross & et. al, 2004) The NPV gives explicit consideration to the time value of money. The NPV is considered a sophisticated capital budgeting technique. “The basic rationale behind the internal rate return (IRR) method is that it provides a single number summarizing the merits of a project. That number does not depend on the interest rate prevailing in the capital market. The number is internal or intrinsic to the project and does not depend on anything except the cash flows of the project” (Ross & et. al, 2004) “Profitability Index (PI) refers to a formula used to represent the relationship between the costs and benefits of a proposed project” (Ross ...