Mba 540 Week 3 Risk Analysis


Risk Analysis on Investment Decision

University of Phoenix

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, 2009). In an effort to expand and remain competitive, SAI wants 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 the maximum value for the organization and investors. One proposal is an internal investment strategy, called Dig-image, which will expand the company’s existing digital imaging market share. The other proposal is an external investment strategy, called W-Comm, which will enter SAI into a wireless communication market.
      An analysis of the two capital project proposals by internal and external valuation techniques and risks associated with the proposed investment decision will be evaluated so the management and board of directors may make an informed decision. A part of the decision making process is to assess capital budgeting and spending associated with each proposal. The capital budgeting process will involve examining the cash flow projections, opportunity costs, net present value (NPV), internal rate of return (IRR), and profitability index (PI) for each proposal.
External Investment Strategies
      An analysis of SAI’s external investment strategy proposal, W-Comm, shows that an expansion into the wireless communication market can increase revenue. The W-Comm proposal is a seven-year project, which requires an $18 million initial capital outlay with a cost of capital at18%, and will use an existing plant for production during the first three years producing 1,000 units per day. (University of Phoenix, 2009). Expansion into a new plant will need to happen by year three...