Silicon Arts Inc. (SAI) is a company with plenty of growth potential. SAI has been in business four years manufacturing Integrated Circuits (IC's) for digital imaging products like digital cameras, medical and scientific instrumentation, DVD players and computers. In 2001, SAI experienced a 40 % decrease in revenues due to a slowdown within the industry. Hal Eichner, Chairman, trying to maintain the competitive edge within the industry has two objectives for the company. He is looking to increase market share and keep pace with technology. The objectives can be reached by expanding the digital imaging market share or SAI can enter into the wireless communications market. The Financial Analyst has been given the task of reviewing proposals projecting revenues for a span of 5-7 years. The determining factors of the proposals will be the Net Present Value (NPR) and the Internal Rate of Return (IRR). The Profitability Index (PI) is a good tool to utilize on small projects so it is not beneficial to this scenario.
When considering the options of increasing the digital imaging (Dig-image) market shares and entering the wireless communication (W-Comm) market all possible risk must be evaluated. The leadership team at SAI has the task of analyzing Dig-image and W-Comm figures to determine which option will benefit the company. The discounted cash flow analysis will help identify relevant cash flows by considering sunk costs, and working capital. The information that is put into the discounted cash flow analysis is projected future cash flows which may give a NPV. If there is an error in the calculations and the NPV remain positive, management may be lead right into a forecasting risk. A forecasting risk is identified by the possibility of errors in projected cash flows that will lead to incorrect decisions (Ross, Westerfield & Jordan, 2006).
The analysis showed the better option for SAI is to enter the wireless communications... [continues]
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