Risk Analysis on Investment Decision
Silicon Arts (SA) manufactures digital imaging circuits (ICs) that are used in a variety of products from DVD players to medical instruments. But as technology continues to change the company is faced with making decisions that will allow them to remain in business. As with many companies in today's business world SA's goals are to increase market share and keep up with the changing wants and needs of consumers. They plan on doing this by either entering the wireless communication market or expanding the existing digital imaging market share.
SA must consider what internal and external investment strategies will yield the best results for the company. The internal strategies used must be based on adequate capital budgeting calculations. "A capital budget is a plan for raising large and long-term sums for investment in plant and machinery, over a period greater than the period considered under an operating budget," (Business Dictionary, 2008). Because the capital budget is for long-term projects the NPV is usually calculated in order to distinguish if the project will yield expected results. As a financial analyst with SA, I decided to perform test in favor of investing in wireless communication. This decision was based on the wireless boom that grows every day. "Today, there are a stunning 2 billion regular paying cell-phone customers around the world," (Rosenbush, 2005). I decided to increase Dig-image cash flows 7% in the first interval versus 8% for wireless, but chose the same increase of 5% at the second interval. I also increased the price percentage and marketing costs at a higher rate for wireless than Dig-image, but none of the increases had a difference of more than 4% between the ...