Stocks and Bonds Valuation

Running Head: RISK ANALYSIS ON INVESTMENT DECISION

Risk Analysis on Investment Decision

University of Phoenix

MBA 540

Risk Analysis on Investment Decision

Every decision a company makes is a capital budgeting decision because it changes the firm’s cash flows. Decisions are usually made for companies based on facts or projected calculated facts. Money talks and does so through measurements that are meant to help CFO’s analyze capital investment proposals. Measurements such as net present value (NPV), internal rate of return (IRR), and profitability index all assist in deciding if a proposal is worth the risk.

Silicon Arts, Inc. (SAI) is a four year old company that manufacturers digital imaging Integrated Circuits (ICs) that are used in digital cameras, DVD players, computers, medical and scientific instrumentation (University of Phoenix, 2008). The company created a specialized data chip and is back on track towards financial growth but has to decide on two proposals. This specialized chip was developed to be use in data embedded mobile phones. There was a successful test conducted by B&U, the world leading manufacturer of mobile handset (University of Phoenix, 2008).

Their largest sales are in North America at 70% but also have presence in Europe with sales of 20% and South East Asia with sales at 10%. SAI had annual sales turnover of $180 million and this is due to growth in semiconductor industry boom in 2000. Then, the industry started slowing down in 2001 and this caused SAI revenues to fall by 40%. SAI made changes because of their lost that included reducing costs and freezing capital expenses. Intelligently, SAI developed the IC-1032.

Dig-image is proposing to set up a plant in Sunnyvale, CA. where they will produce the existing range of SAI’s Integrated Circuits. This project is estimated to last for five years with a contribution of 30% to SAI’s annual revenues. With the sales of about 400,000 chips, $54 million worth...