Risk Analysis on Investment Decision

Risk Analysis on Investment Decision

In the Capital budgeting simulation conducted for Silicon Arts Inc. my job as a the Financial Analyst is to analyze the two proposals and come to a decision that meets the goals of the company to increase its market share and to keep pace with technology. In order for Silicon Arts Inc to achieve this we need to decide on either increasing their market shares in the Digital Imaging market or enter the Wireless Communications market.

In markets that constantly change in technologies Silicon Arts Inc. needs to consider this in making its decision. Though the Global Digital Imaging semiconductor market forecasts for a growth of 20% in the 1st year and demand to grow 7% between years 2-4, one has to consider that new technology will replace the old technology by the end of year 5. The overall growth is great for the industry but another factor that will affect Silicon Arts sales volume is the rumor that one of their major competitors is introducing a cheaper similar product in early year 1. I feel this will make a major impact. As mentioned before, technology is always changing and products are being introduced everyday and getting cheaper every time, for example portable CD players was very popular when it was first introduced, as time passed a new product the mp3 player ultimately replaced the portable CD player. Silicon Arts can use the sensitivity analysis to examine how sensitive the Net Present Value is to changes in basic assumptions (Ross, Westerfield, & Jaffe, 2005,Chapter 8). In the simulation I was able to see how sensitive these changes were to revenues by changing the volume of sales, increasing or decreasing the percentage of price per unit and the increasing or decreasing of the percentage of marketing costs. In the second cycle of the simulation I needed to analyze the Capital Expenditures for the two proposals.

The land that Silicon Arts Inc purchased years back could have been put to better use since it was not being productive. This land I would consider as an opportunity cost. Though they didn’t take advantage of leasing the land prior to making the decision to build on it, the opportunity to increase cash flow during that period of time was lost. The cost that was incurred in market research would be considered a sunk cost because I chose for Silicon Arts to purchase Gus Longman’s company. “A sunk cost that has already occurred” (Ross, Westerfield, & Jaffe, 2005,Chapter 7). The acquisition though costly I feel it is better because they now have the state of the art technology needed for their entrance in the wireless communications market. The acquisition of DigIC is a big risk for Silicon Arts Inc. It is a risk with strategic benefits. “A