Investment Decision Capital Budgeting and Risk



Investment Decision Capital Budgeting and Risk

Introduction

In the capital budgeting simulation, Silicon Arts Incorporated (SAI), a manufacture of digital imaging integrated circuits would like to increase market share and keep up with the changing technology. The change in the firm's mission and/or goals will involve internal and/or external risks. Net Present Value, Internal Rate of Return and Profitability will also be used to analyze the best alternative opportunity for LEI. LEI will have to evaluate external strategies, internal strategies and risks associated with the investment decision.

Analysis

Two mutually exclusive investment opportunities have been presented to LEI. Option one would involve LEI to merge with and later acquire Shang-wa, production facilities, to prevent losing market share. Option two, LEI would have to be acquired by Avral. With option two, LEI would lose brand name but also stands to expand as a global distributor. The Financial manager at LEI primary responsibilities includes analysis of the two investment opportunities presented to determine the best opportunity for the firm and shareholders.

External Investment Strategies

After performing the analysis in the simulation, I determined W- Comm was the best alternative for SAI. The expansion into the wireless communication market with W-Comm produced higher values for NPV, IRR and PI. The current market with the semiconductors is uncertain. Great financial decisions are based on assumptions with good data. The semiconductors integrated circuits would have a 2G technology and would more than likely be out dated in the short future. Therefore, it is an intelligent decision to allocate the firms resources into something that will be about the future revenue and not the past. Corporate synergies are expected to increase revenue with the two firms working together than separately (Eun & Resnick, 2004).

This is what LEI would have to take into consideration when deciding which opportunity to invest in. LEI can achieve a successful synergies based on the financial information presented in the scenario. The possible sources of synergy fall in four basic categories: revenue enhancement, cost reduction, lower taxes and lower cost of capital (Ross, 2004). With the creation of the new synergy, LEI stands to gain market power, complementary resources and higher NPV (Gray & Larson, 2006).

Internal Investment Strategies

Firms with increased cash can either pay shareholders dividends or reinvest in a project a pay out future cash flows on the project. The capital asset pricing model (CAPM) assumes that ...