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Submitted by aljohns1 on February 12, 2008
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Risk Analysis on Investment Decision
University of Phoenix
MBA 540
In the capital budgeting simulation, several risk associated with Silicon Arts Incorporated (SAI) were presented. SAI is a digital imaging company who manufactures digital imaging integrated Circuits (IC's) that are used in digital cameras, DVD players, computers, and medical and scientific instruments. The company's goal is to increase their share of the market while staying in tune with technology. SAI has proposed two options to accomplish this, expand the current digital imaging market share and implement interested into wireless communication market. The review of the cash flow projections show opportunity costs, NPV, and IRR for each option. These reviews show a more practical investment choice is for SAI to enter the wireless communication market. The internal and external valuation techniques will be used to discuss risks associated with the proposed investment resolution to accept or further develop a particular project.
Several risks were presented in the stimulation. The sensitivity analysis approach to analyze the impact of risk on capital budgets was discussed. "The sensitivity analysis approach is rudimentary and is primarily useful in drawing the analyst's attention to the most important sources of risk to the project" (Sick, 2006, pg. 11). For example, the simulation evaluated a simple sensitivity analysis of NPV changes as a result of changes in cost of capital, cash flow, sales projections, etc. "The sensitivity analysis is one approach (a.k.a. what-if analysis and bop analysis1), which examines how sensitive a particular Net Present Value (NPV) calculation is to changes in underlying assumptions" (Ross 2005 p169). This tool helps to also identify the probability of the projects possibility of a negative value. Thus, "sensitivity analysis examines how sensitive a particular NPV calculation is to changes in...
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