University Of Phoenix
Risk Analysis on Investment Decision
Arnita Johnie February 3, 2009
MBA 540
Risk Analysis on Investment Decision
Silicon Arts Incorporated, (SAI) is a successful high tech firm company that is in the process of pursuing business proposal options with the goal to “increase market share, remain competitive and keep up with technology.” (Capital Budgeting Simulation) Although SAI has been in business for only four years, as a company, they currently report an annual sales turnover of “$180 million.” (Capital Budgeting Simulation) SAI's chairperson, Hal Eichner, has presented two proposal options that both equally come with risks that could negatively set back SAI's existing strong financial standing. This paper will not only identify these risks and possible ways to mitigate them but will also discuss valuation capital budgeting techniques.
The two proposal options SAI is considering is to “expand the existing Digital Imaging market share or enter the wireless communication market.” (Capital Budgeting Simulation). The first proposal option with Dig image would be considered an internal investment decision because for SAI this investment would fall within the industry realm that they currently reside in. Whereas, the second proposal option with W-Comm would be considered an external investment because they would be entering the wireless communications market which is one that is considered foreign to them.
Before SAI makes a decision they need to take into consideration the cost of the project and which proposal will increase future cash flows. The measurement of the factors net present value, profitability index and internal rate will give SAI a strong idea which investment decision is more favorable. For example, the measurement of net present value is the most important out of these three factors aforementioned only because if its valuation proves to be positive or negative, it will...