Sai
Risk Analysis
In the Capital Budgeting scenario (UOP, 2002), Silicon Arts (SAI) is portrayed as a young company that specializes in manufacturing digital imaging integrated circuits (IC) for utilization in digital cameras, DVD players, computers and other scientific instrumentation. The company has a strong sales base in North America while also selling into the European and Asian markets. The company has been successful with 70% growth in 2000. This success was followed by a 40% decrease in revenues due to a change in industry market. To compensate, SAI was forced to freeze capital expenses and reduce costs. An additional strategy was the development of the IC 1032, which could be utilized in an emerging market space within the industry and allowed the company to again achieve strong financial growth in the last half of 2001. SAI entered 2002 in a much stronger financial position but was faced with the option to expand their current digital imaging market share or enter the wireless communication market with a new product. This paper will discuss the risks and mitigation of the risks connected to the internal and external valuation techniques used to determine the best plan for SAI.
The primary valuation techniques used for analysis were net present value (NPV) and the internal rate of return (IRR) to determine which option was best for SAI. According to Ross, Westerfield and Jaffe (2005), the calculation of NPV should only utilize the incremental cash flows to the project, as they are cash flows that are directly related to the project itself. In other words, managers are interested in the cash flows of the firm both with and without the proposed project. For the NPV technique in the scenario, sunk costs were not utilized, as they were the costs that had already occurred and did not relate directly to the project. On the other hand, the opportunity costs and side effects were considered. The NPV of the digital image project was $13,248,000 whereas...
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