Risk Analysis Investment

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Category: World History

Date Submitted: 05/24/2008 01:34 PM

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Silicon Arts Inc. is a four year-old company that manufactures digital imaging integrated components that are used in digital cameras, DVD players, computers, and other types of medical and scientific instruments. During the risk analysis simulation two capital investment proposals were presented. To successfully complete the simulation it was necessary to determine the effectiveness of each proposal and select the appropriate situation for Silicon Arts.

Two investment proposals were presented from Dig-image and W-comm. To effectively determine which proposal was the best, the Net Present Value (NPV), Internal Rate of Return (IRR) and Profitability Index (PI) were calculated to compare these two unique proposals. Utilizing the variables within the scenario I was able to simulate variety of different situations that could affect each proposal. The following techniques were used to determine the best fit proposal for the scenario: internal and external investment valuation techniques and risks associated with both of these investment opportunities.

External Investment Strategies

External costs and risks are determined by finding the upfront cost of a project, as well as the future cash flows resulting from the project or expansion. With both of these pieces of day you can calculate the NPV of the projected, and the internal rate of return for the entire project. . If the NPV is positive, or if the IRR exceeds the Weight Average Cost, the firm undertakes the project; otherwise it does not (Risk, 2004).

Budgeting for capital decisions is difficult, as it sometimes difficult or impossible to determine the exact upfront costs that will be required to move forward with the project. It is necessary in this scenario as well as real-world applications to estimate these values. Estimates will contain some degree of uncertainty; the process is inherently risky (Risk, 2004).

The acquisition of one firm by another is clearly an investment made under...