Running head: RISK ANALYSIS SIMULATION
Risk Analysis Simulation
Tiffany Abenojar & Khalilah Pinckney
University of Phoenix
Risk Analysis Simulation
Silicon Arts Inc. (SAI) is a four-year-old company that manufactures digital imaging integrated Circuits (IC’s) that are used in digital cameras, DVD players, computers, and medical and scientific instruments. SAI’s Chairman, Hal Eichner, has a two-point agenda for the company: 1) increase market share, and 2) keep pace with technology. As the Financial Analysts for the company, we analyzed two mutually exclusive capital investment proposals. These two options are to expand the existing Digital Imaging market share or enter the Wireless Communication (W-Comm) market (UOP Simulation, 2008).
Shareholders in organizations like to invest in projects that are worth more than they cost. The difference between the two is the Net Present Value (NPV). Assuming you will be maximizing the shareholders wealth, when calculating the NPV, the project with the positive outcome will be the project that should be pursued. In capital budgeting, the profitability index (PI) measures the dollar return for the amount invested. Hence, PI is useful for capital rationing (Ross, et al, 2005). The investment in net working capital is an important part of any capital budgeting analysis. NPV calculates all cash flows rather than profits, however, used alone can result in a false sense of security (Ross, et al, 2005).
In capital budgeting, there should not be total confidence placed in NPV calculations alone – several analyses exist to provide additional support for goof investment analysis. The sensitivity analysis is one approach, which examines how sensitive a particular NPV calculation is to changes in underlying assumptions (Ross, et al, 2005). A downside to sensitivity analysis is that it treats each variable in isolation. Scenario analysis, a variant of sensitivity analysis, allows several factors to be...