Risk Analysis on Investment Decision

Running head: RISK ANALYSIS ON INVESTMENT DECISION

Risk Analysis on Investment Decision

Katrina White

University of Phoenix

MBA/540 - Maximizing Shareholder Wealth

November 10, 2008

Oscar Lewis, Instructor

Risk Analysis on Investment Decision

Silicon Arts Incorporated, a four-year old high tech firm with annual sales turnover of $180 million, has a two point agenda, which is to increase market share and keep pace with technology (Apollo Group, 2002, Capital Budgeting Simulation). Hal Eichner, SAI's chairperson, figured the company has two options to achieve their agenda, which is to expand the Digital Imaging market share or enter the Wireless Communication market (Apollo Group, 2002, Capital Budgeting Simulation). Each proposal has a risk associated with it. This paper will identify capital budgeting techniques, risks associated, and ways to mitigate those risks.

In order for Silicon to determine which proposal is worth it, risk needs to be determined, cost of the project, and future cash flows.

Apollo Group of Hospitals, Kakinada Branch

English: Church of St Mary Magdalene in Westerfiel...

Ken Westerfield Today

Three components will be measured to determine if the proposal is good or bad. The first component is net present value. If the net present value is positive then the proposal should be accepted; however, if it is negative then the company should reject the proposal. Internal rate of return and profitability index are also considered; however, the decision is not as highly weighted on these as it is on net present value.

"A firm should be acquired if it generates a positive net present value to the shareholders of the acquiring firm" (Ross, Westerfield, & Jaffe, 2005, p. 2). According to the results of the simulation, Wi-Comm was the best choice. Silicon should evaluate whether or not it would be of better value to them though to increase market share and keep pace with technology by acquisition instead of investing in...