Capital Budgeting Simulations

In working through the Capital Budgeting Simulations many areas bring many risks to the table. The major risk associated not so much with a decision, but how the decision is made, is that of being favorable in one direction. It is easily realized that by being conservative, moderate, or aggressive can heavily sway the NPV for any given proposal. A better way to think about this is if we compare these terms to pessimistic and optimistic views. "Suppose all pessimistic forecasts yield positive NPVs. A manager might feel that there is no way the project can lose money. Of course, the forecasters may simply have an optimistic view of a pessimistic forecast" (Ross, 2004, pg216).

This may also be the case when certain areas are looked at such as sales volume, price and marketing cost. If an individual that was preparing the proposal leaned toward one proposal they might throw off numbers to make one look more favorable. When faced with large possible projects it is best to have multiple people evaluating. This would eleviate the possibilities of these numbers being skewed. The best way to approach this type of situation is to be conservative, moderate or aggressive when dealing with both proposals. This would allow for them to be compared at all possible outlooks.

The next risk that is seen when evaluatin the two possible projects is the risk of accepting or rejecting. With information provided we are able to compare data to the specific projects. But in the end we compare data to. In navigating through the scenario the first risk is seen in the two point agenda which is a) increase market share and b) keep pace with technology. These two goals give way to the two proposals of a) Expand the exsisting Digital Imaging market share and b) Enter the wireless communications market. The risk with both of these that are not taken into consideration na be analyzed with scenario analysis. This could anlyze factors such as possible products that would compete with the IC 1032 or changes in the forecast for digital imaging semiconductor market. These are areas that could pose large risks for these projects. After using the scenario analysis the company could weigh the risk with the possible outcomes to give management a better understanding of the senerios that might affect the projct.

In beggining to review the estimates sales, volume, price and market costs the competition risk becomes evident in analyzing Dig-image. With rumors of feirc competition could affect projected sales voume by 5%. Without researching and analyzing the possible risk of this the NPV could greatly be affected. By ingnoring the possible changes and being more optimistic the NPV could be altered by thousands. On the same front the W-comm is threatened by possible up coming advancements is the cell phone technology. This could alter the R&D cost dramatically.

The next areas to look at is the are of capital expenditures. Here the company is faced with the risk of going with a new provider even though the previous has proved to be a good relationship. Here the risk is unkown. The price may be right but the risk is not as much nominal in comparison of he other company.

The next idea that was evient in comparison to the timeline Dig-image is looked at in a 5 year timeline while W-comm is looked at over 7 years. This proposes the question of where the Dig-image will be in 2 more years. While looking at W-comm it is notcable that I the 4 year t will have a neative cash in flow. If by this time the technology has caught uphere doe s ths put the project in.

In working through the Capital Budgeting Simulations many areas bring many risks to the table. The major risk associated not so much with a decision, but how the decision is made, is that of being favorable in one direction. It is easily realized that by being conservative, moderate, or aggressive can heavily sway the NPV for any given proposal. A better way to think about this is if we compare these terms to pessimistic and optimistic views. "Suppose all pessimistic forecasts yield positive NPVs. A manager might feel that there is no way the project can lose money. Of course, the forecasters may simply have an optimistic view of a pessimistic forecast" (Ross, 2004, pg216).

This may also be the case when certain areas are looked at such as sales volume, price and marketing cost. If an individual that was preparing the proposal leaned toward one proposal they might throw off numbers to make one look more favorable. When faced with large possible projects it is best to have multiple people evaluating. This would eleviate the possibilities of these numbers being skewed. The best way to approach this type of situation is to be conservative, moderate or aggressive when dealing with both proposals. This would allow for them to be compared at all possible outlooks.

The next risk that is seen when