Risk Analysis on Investment Decision

Risk Analysis on Investment Decision

Silicon Arts Incorporated (SAI) is a four-year-old company that manufactures digital imaging integrated Circuits (ICs). "SAI plans to pursue its growth plans and currently has 2 options: 1) expand their existing Digital Imaging market share or 2) enter into the Wireless Communication market" (UOP Simulation, 2008). Both alternatives have areas of opportunity as well as potential risks that the company will have to consider. Net present value, internal rate of return, and profitability index are measures Silicon Arts Incorporated (SAI) used to compare the two mutually exclusive capital investment proposals. This paper will analyze the investment risks associated with each proposal to determine their best option.

The market research report predicts that the Digital Imaging market will grow by 20% in the first year with competition increasing proportionately. The marketing costs will increase 5% of sales in years 1-3 for SAI. In years 4 and 5 sales growth is expected to decline to around 10% annually. The issues associated with this proposal include price wars, increased competition, and price decreases in the second and third year by 5% with a steeper decrease in the fourth and fifth year. Its life scale is estimated at five years. Rumors are that one of SAI's competitors is currently working on a low-cost IC version for Digital