Risk Analysis on Investment Decisions

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Risk Analysis on Investment Decisions
Investment techniques used in corporate finance when making decisions on projects usually focuses on cash flows of the firm (Ross, Westerfield, and Jaffe, 2004). Because of drastic changes in the business environment over the last decade, managers are requesting better, more accurate information, and improved techniques to meet company needs for making major decisions with data consisting of clear goals, a planned design, high ethics, revealed limitations, adequate analysis, and justified conclusions (Cooper and Schindler, 2003). In this paper, the methods of net present value and internal rate of return are examined based on real-world capital budgeting decisions. This paper also gives insight on valuation techniques used to determine internal and external investment decision strategies and the risk associated with the investment decisions.

In the Capital Budgeting Simulation, Silicon Arts Incorporated (SAI) is a four-year old company that produces digital imaging integrated circuits (IC) used in computers, digital cameras, medical and scientific equipment, and DVD players. The company presents a strong front in North America, generating 70% in sales annually, capturing 20% in sales in Europe, and 10% in sales in South East Asia. SAI's annual sales turnover is $180 million. In the last few years, Silicon Arts Incorporated‘s revenues have decreased by 40% due to industry slowdown which led SAI to freeze capital expenses and reduce capital costs. Kathy Lane, Chief Financial Officer of Silicon Arts Incorporated, requested the post financial analyst to analyze two capital investment proposals set-up by Hal Eichner, chairman if SAI, and determine the best proposal that will increase market share and help the company remain competitive. The company is faced with deciding to expand the existing digital imaging market share or enter into the wireless communication market by determining net present value and internal rate of...
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