Risk Analysis on Investment Decision
Silicon Arts, Inc. (SAI) is a four year old company that manufacturers digital imaging Integrated Circuits (ICs) that are used in digital cameras, DVD players, computers, medical and scientific instrumentation (University of Phoenix, 2008). Their largest sales are in North America at 70% but also have presence in Europe with sales of 20% and South East Asia with sales at 10%. SAI had annual sales turnover of $180 million and this is due to growth in semiconductor industry boom in 2000. Then, the industry started slowing down in 2001 and this caused SAI revenues to fall by 40%. SAI made changes because of their lost that included reducing costs and freezing capital expenses. Intelligently, SAI developed the IC-1032. This specialized chip was developed to be use in data embedded mobile phones. There was a successful test conducted by B&U, the world leading manufacturer of mobile handset (University of Phoenix, 2008). SAI again started performing well in the market with increase revenues and growth.
Hal Eichner, SAI’s Chairman has a two point agenda and that is to increase market shares and keep pace with technology. In an effort to meet the agenda, SAI has two options. The first option is to expand the existing digital imaging market share, and the second option is to enter the wireless communication market. Each proposal cash flow projects, opportunity costs, net present value (NPV), internal rate of return (IRR) and profitability index (PI) will be evaluated to determine the best investment decision for SAI. This paper will discuss the valuation techniques, and analyze the risks associated with the investment decisions.
Dig-image is proposing to set up a plant in Sunnyvale, CA. where they will produce the existing range of SAI’s Integrated Circuits. This project is estimated to last for five years with a contribution of 30% to SAI’s annual revenues. With the sales of about 400,000 chips, $54 million worth...