Risk Analysis of Investment Decision
Fred Smith
University of Phoenix
Maximizing Shareholder Wealth/MBA 540
George Peterson
May 3, 2007
Risk Analysis of Investment Decision
Capital budgeting decisions typically include carefully analyzing the net present value (NPV) and the internal rate of return (IRR) of a project. In addition to the preceding analysis, relevant cash flows of a project also need to be examined. The following will provide a risk analysis of an investment decision made at Silicone Arts Incorporated (SAI).
SAI is a digital imaging integrated circuits manufacture that was established approximately four years ago. The products manufactured by SAI are primarily used in digital cameras, DVD players, computers, and in medical and scientific instruments. The organization, in order to further its growth must decide upon one of two options, those options being; expand the existing digital imaging market share (Dig-image proposal) or enter into the wireless communications market (W-Comm proposal). The Dig-image proposal provides evidence that the digital imaging market will grow nearly 20% in year 1, then an additional 7% each year thereafter. SAI already holds 18% of the current market and has the potential to expand this market should it open up a manufacturing in Sunnyvale (five year project that will make a projected 30% contribution to revenue). The W-Comm proposal offers that approximately 12.5 million data enabled mobile handsets will be sold by year 3, and of that 12.5 million, SAI could potentially have a 3-4% market share. Production of the commercial units needed to enter into this market can be manufactured using excess real estate for the first 3 years.
The first part of the ...