Risk Analysis on Investment Decision
Silicon Arts Inc. (SAI) “manufacturers digital imaging Integrated Circuits (IC's) used in digital cameras, DVD players, computers, and medical and scientific instrumentations” (University of Phoenix, 2008). Looking to expand and remain competitive, SAI has an agenda to increase market share and keep pace with today’s technology. SAI will analyze two capital investment proposals with a goal of selecting the project that generates maximum value for the organization and investors. This paper will discuss the valuation techniques of an internal and external investment strategy, and the risks associated with investment decisions.
SAI is exploring two options, one an internal investment strategy called Dig- image, a proposal to expand their existing digital imaging market share. The second option, an external investment strategy, W-Comm, is a proposal to enter the wireless communications market. The capital budgeting process including: net present value (NPV), internal rate of return (IRR), and profitability index (PI) will be applied to each proposal, revealing the best investment decision for SAI.
External Investment Strategy
SAI”s external investment strategy proposal, W-Comm, is an expansion into the wireless communication market. This seven-year project, which requires an $18 million initial capital outlay at a cost of 18%, will use an existing plant for production during the first three years producing 1,000 units per day. By the third year, a new plant will be necessary. The expected capital outlay for the new plant will be approximately $16 million and will produce approximately 3000 units per day. The barriers include competition and comparable products. A good e ...