Silicon Arts Inc. Risks And Mitigation

Risks and Mitigation

MBA 540

Week 3

July 2, 2007

Silicon Arts Inc. (SAI) has two capital investment proposals that need to be researched in order to choose the one that will yield more return on investment and that will have the best growth in years to come. These two proposals have been set up by a task force set up by the chairman Hal Eichner, who has a two-point agenda for the company: a) Expand the existing Digital Imaging Market share, and b) Enter the Wireless Communication market. Even though both markets are expected to grow, SAI needs to be aggressive in its investments for each of the markets to ensure SAI’s market share grows and defend against competitors.

In order to evaluate both proposals different measures such as the NPV, IRR, and PI are used. The reliability of these measures depends on the assumptions made regarding cash flow projections. Not only is that so, but also by adjusting the stance from a conservative to moderate or aggressive, the values of NPV, IRR, and PI could also be higher for either proposal. After going through the simulation a number of times, my result was the same. From reading the numbers and changing to different stances, the proposal that was picked was the Digital Imaging proposal. This proposal had a higher value for all three measures and therefore it was concluded that it would be the best proposal to go with.

The decision to invest in either proposal was based on the cash flow the company would have for it. From there it was just a matter of deciding what increases would be from year 1 to year 3 and again from year 4 to year 7 and how much the price would increase for the same time period. To reach the desirable outcome of identifying which proposal will have the most yield, it is necessary to analyze the risks associated with the investment decisions. These risks include initial tests, competition, comparable products, and price decrease over the years.

The initial tests are very crucial risks simply because if the tests are successful then production can continue on with full scale; otherwise there is no need to continue. During this initial test stage the decisions to take need to be successful at every step of the way so that the product can get to production. “There is usually a sequence of decisions in NPV project analysis. This section introduces the device of decision trees for identifying these sequential decisions” (Ross Ch. 8). If the initial tests fail the only mitigation needed to correct the problem is to change the product to pass that point of failure. A sort of trial-by-error approach is needed to take the product from an idea to an actual tangible reality.

Another risk associated is the competition. The forecast show that the Digital Imaging market is growing and with it there are new companies appearing proportionately to take their part of the share. “SAI is a four-year old company that has presence in North America (70% sales), Europe (20% sales) and South East Asia (10% sales). SAI’s annual sales turnover is $180 million” (UOP Simulation). With these numbers SAI will need to stay ahead of the competition by using the mitigation technique of acquiring the competition. If a company is in its early stages and shows potential for building a product that SAI could use, they SAI can invest in that company for the first two or three years then once the company is well established, SAI can just acquire it. If the company that is competing is already established, then SAI can offer either a deal to the company or just acquire it via a hostile takeover. Since SAI is already established, it should not be much of a problem to acquire the competition.