Risk Analysis On Investment Decision

Risk Analysis on Investment Decison

University of Phoenix

MBA 540

June 11, 2007

Risk Analysis on Investment Decision

Silicon Arts, Inc (SAI) is a manufacturer of digital imaging integrated Circuits. The circuits are used in digital cameras, DVD players, computers, and other digital equipment. Which were sold in North America, Europe, and South East Asia earning SAI annual sales of $180 million. After a slowdown in 2001, SAI's research and development departments developed a specialized chip used in mobile phones. This chip has helped SAI to enter 2002 with a strong financial position and growth plan.

"SAI wants to increase market share and keep up with technology, which can be done by either expanding their existing Digital Imaging market share or by entering the wireless communication market." (UOP, 2005). This paper will help to analysis the risk of the investment decision SAI is trying to decide.

External Investment Strategies

An analysis of the external investment strategies shows that an expansion into the wireless communication market can increase revenue. A good external investment strategy that will increase revenue is to merge or acquire another company in the industry. The basic idea of an acquisition is to generate greater revenue, which is what SAI wants to achieve. "An acquisition has four sources of synergy: revenue enhancement, cost reduction, lower taxes, and lower cost of capital." (Ross, 2005) SAI will use these ideas to achieve growth expansion without a merger or acquisition. Next the paper will look at internal investment strategies.

Internal Investment Strategies

SAI's internal investment strategies were looked at to determine if the project undertakes will be greater than the financials asset of the comparable risk by looking at the risk of expanding market share of digital imaging versus entering the wireless communication market. When working through the scenario with a discount on the cash flow the wireless communications project had a NPV of 14,026 and the digital imaging had a NPV of $5,448 showing an internal rate of return of 32.00 for wireless communication and 23.40 for