Risk Analysis on Investment Decision
Silicon Arts, Inc. is a successful semiconductor manufacturer that focuses on digital imaging Integrated Circuits (ICs) for many different consumer and high precision electronics. From digital cameras to medical instrumentation, Silicon Art’s products can be found as the heart of these electronics. Given the current sales turnover of $180 million, the company is poised for growth with available free cash flow and fresh investment dollars to fund new opportunities. In the simulation, two potential expansion plans is considered. It is cleared at the simulation level that the Company will only have the financial and human resource to engage into one of these projects. Therefore, a careful analysis of Net Present Value (NPV), Internal Rate of Return (IRR), and Profitability Index (PI) to determine the project of choice for the company’s upcoming expansion strategy.
For quick reference, Net Present Value is an indicator of how much a project will add value to the company. Internal Rate of Return is a measure of how efficient the project is to the company. Profitability Index considers the ratio between future cash flows and initial investment of the project. These metrics, when considered together, gives a clear indication of how well an investment will perform against each other for the company, and then an ultimate choice is then selected for the company to execute. Given the management’s inability to come to a consensus before the study was conducted, a financial recommendation will help guide the senior management on the right path to decide which project is the best option for the company.
The first project being considered is an expansion of manufacturing capacity of ...