Silicon Arts Inc. (SAI) is a four-year old company that manufactures digital imaging Intergrated Circuits (IC’s) that are used in digital cameras, DVD players, computers, and medical and scientific instrumentation. It has presence in North America (70% sales), Europe (20% sales), and South East Asia (10% sales). SAI’s annual sales turnover is $ 180 million. (UOP. 2005).
SAI’s goal is to increase market share while keeping pace with technology. Proposals are introduced in order to meet these goals. The two options are: expanding the existing Digital imaging market share or entering into the Wireless Communication market.
Measures such as Net Present Value (NPV), Internal Rate of Return (IRR), and Profitability Index (PI) must be used to compare two different capital investment proposals. It is important to analyze their cashflow statement prior to arriving at the final NPV, IRR and PI values.
The reason why NPV is so valuable to the company is because shareholders of organizaions want to invest in projects that are worth more than they cost thereby reaping positive NPV. Reasons why IRR is valuable is because an organization would like to know whether the project’s return is higher or lower than the opportunity cost of capital.
The proposal that was chosen was Wireless Communications with a market forecast of 7 years. Within those 7 years the company estimates Net cash flow of $21,711,000. Mobile handsets market is growing and about 25 million handsets are expected to be sold in year 3. The market is expected to grow 10 % annually between years 4 and 7. 50% of these 25 million (12.5 million) to be data enabled, and will use semi conductor chips like IC 1032 developed By SAI. The market is expected to grow 10% annua ...