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Risk Analysis on Investment Decision
In Capital Budgeting Simulation, Net Present Value (NPV), Internal Rate of Return (IRR), and Profitability Index (PI) can be analyzed two mutually exclusive capital investment proposals. Silicon Arts Inc. (SAI) is a four-year-old company, manufactures digital imaging integrated Circuits (ICs) that need to analyze two capital investment proposals to pursue its growth plans. “SAI’s Chairman is planning to increase market share and keep pace with technology, which can be done by either expanding the existing Digital Imaging market share or entering the Wireless Communication market,” (Simulation, UOP). An analysis reveals that an expansion into the Wireless communication can be beneficial than Dig-Image. However, a number of risks, internal and external are inherent in joining this industry. This paper will analyze investment risk decisions and mitigation of risks by using a number of strategies.
One risk associated with cost of capital in W-Comm proposal will be excess real estate at the Santa Clara plant that can be used the cost of capital $18 million in the first three years. “Cost of capital is the rate of return that SAI could be able to earn at the same risk level as investment that has been selected” (Ross-Westerfield-Jaffle, 2004). SAI can mitigate this risk through liquidity enhancements by bringing uninformed investors. Company should use stock splits which makes a round lot more affordable small businesses and uninformed investors by facilitating stock purchases. SAI can be lower its cost of capital and acquiring liquidity by offering its stocks through internet. Direct stock purchase plans and Dividend reinv ...