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MBA540 Week 3. Full credit paper.
Risk Analysis on Investment Decision
Introduction
Capital budgeting is the process that firms use to evaluate and select long-term investment projects. A firm’s capital budge represents its expected commitments to long-term investments such as capital equipment, purchase or lease of buildings, and technology development. Ideally, all investment projects and opportunities that enhance shareholder’s wealth should be pursued, but because the amount of capital available is limited, sometimes firms need to choose between two mutually exclusive projects. The simulation about Silicon Arts Inc. (SAI) has given financial manager an opportunity to access capital budgeting techniques to choose between the Di-image proposal, which would likely to enhance SAI’s internal investment value by expanding existing market share, and the W-Comm proposal, which would likely to expand SAI’s external investment horizon by entering the wireless communication market.
Evaluation of Internal and External Investment Strategies
Conceptually, capital budgeting is not difficult. The main methods used for project evaluation are the net present value (NPV) and the internal rate of return (IRR) method. According to the NPV and IRR rule, an investment project is viable if the NPV is positive or if the IRR is higher than the cost of capital. When comparing two mutually exclusive projects, the project with higher NPV should be chosen over the one with lower NPV. Both the NPV and the IRR of a project depend on the cash flows associated with the project. The initial investment required by the project, the expected return of the investment, or the discount interest rate, and inf ...