Capital Budgeting Simulation

Essay by maguirre2005University, Master'sA-, January 2008

download word file, 3 pages 4.6

I have been hired by Silicon Arts Inc (SAI) to recommend the better of two projects. The goal of the proposals is to increase market share and keep up with technology. This will be met by either growing the current semiconductor project or by venturing into new wireless technology sales. Before selecting my recommendation, I will study the initial budget assessment at hand. However, numbers alone will not be the determining factor. Many times common sense can be a valuable ally.

The first of the two proposals would be to increase the existing Dig-Imaging semiconductor market share. The tempting aspect of the project is that there is an estimated product market increase of 20% in the first year plus a 7% increase every year there after for five years. SAI current owns 18% of the current semiconductor market. By increasing its production output for the first year to 400,000 chips, SAI can tap into this projected market growth.

If the numbers can be justified, this would mean that SAI would increase its market share by 3.6% (20% of 18%) in the first year and by 1.26% (7% of 18%) in years' 2-5. The overall projected increase in revenues is 30% (54 million) in year one. To boost production, SAI will have to set up an addition plant in California (40 million cash out). Increased revenues can now be adjusted at 14 million (54 cash - 40 investment) for the first year. The plant maximum output is expected at 10,000 units per day. Common sense will dictate that that someone grossly over-estimated the space and machinery needed for such a project. There is roughly 261 working days in one year (365-52 Saturdays - 52 Sundays). This means that the plant would be capable of producing 2,610,000 chips in one year...