The capital budgeting simulation presented a company by the name of Silicon Arts Inc (SAI), a four year old company that manufactures digital imaging integrated circuits and has an agenda to increase their profit share and keep pace with today’s technology. This paper will discuss the external and internal risks associated when making a decision to accept tor reject a particular project.
Silicon Arts Inc. (SAI) manufactures digital imaging Integrated Circuits (IC’s) used in digital cameras, DVD players, computers, and medical and scientific instrumentations (University of Phoenix, 2009). 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. SAI is exploring two options, one an internal investment strategy called Digi-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.
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 of producing 1000 units per day (University of Phoenix, 2008). 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 (University of Phoenix, 2008). The barriers include competition and comparable products. A good...