Risk Analysis on Investment Decision-Silicone Arts Inc.
One must consider the risk associated with their choices when evaluating equal investments. Both Digital Imaging and Wireless Communications have offered Silicon Arts Incorporated (SAI) with investment proposals. SAI is a young company (only four years old) that currently holds 18% of the Digital Imaging semiconductor market. They are looking to expand and must decide which proposal to accept. Before SAI can decide, the risks of doing business with either company must be considered. Both options require significant costs of equity and carry associated risks which must be alleviated in order to decide on which growth strategy will be more beneficial for the company.
Market research was conducted on both alternatives, which entailed a market forecast, market predictions, identified available and emerging markets, entry barriers, a marketing strategy and possible competitors. Applying marketing assumptions in sales volume and price per year and marketing costs as a percentage of sales, the decision was clear to pursue expansion of the Digital Imaging Market. DI had an NPV of $18, 285 and an IRR of 34.10%, W-Comm had $13,139 and 30.70%, respectively. This by no means determines the winner between the two options, but brings the decision process forward one step.
Capital expenditures provided the bulk of the outgoing cash SAI would experience. A projected cash flow analysis was conducted to produce an optimal capital expenditure schedule. The choices were to stay with existing vendors or go with new ones for plant and equipment. Hathaway and 6C, the existing vendors, offered 65% to be paid in year 1, but the discount rate would also fall at the rate of $1 million per 5% reduction in the initial payment. J and T offered 50% repayment in year 1 with remaining 50% to be paid in years 2 and 3 at 25% per year. Hidden cash flows were identified and incorporated into the NCF analysis. One point to consider is no...