Risk Analysis
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Running head: RISK ANALYSIS
Risk Analysis
University of Phoenix
MBA 540: Maximizing Shareholder Wealth
Thursday, August 06, 2009
Risk Analysis (started @6:15)
“Capital budgeting is vital in marketing decisions. Decisions on investment, which take time to mature, have to be based on the returns which that investment will make. Unless the project is for social reasons only, if the investment is unprofitable in the long run, it is unwise to invest in it now. Often, it would be good to know what the present value of the future investment is, or how long it will take to mature (give returns). It could be much more profitable putting the planned investment money in the bank and earning interest, or investing in an alternative project. (University of Phoenix, 2002 )” In the Capital Budgeting simulation, Silicon Arts Incorporated (SAI) was in a strong financial position with plans to pursue growth options that would allow them to increase their market share and keep pace with technology. This paper will discuss valuation techniques associated with SAI’s investment strategies as well as analyze their associated risks.
Valuation Techniques
From the simulation, SAI had the option to pursue two paths to meet the desired growth goals. The first path was an internal investment option centered around expanding their existing Digital Imaging market. The second path was an external investment option that would allow them to enter the Wireless Communication market. After some careful analysis, the growth path for SAI would eventually be decided based on the results of one of the following valuation techniques: Net Present Value (NPV), Internal Revenue Review (IRR), or Profitability Index (PI).
Net Present Value is the first valuation technique considered in the valuation of the two options being explored by SAI. “The Net Present Value (NPV) of an investment (project) is the difference between the sum of the discounted cash flows which are...
Risk Analysis
University of Phoenix
MBA 540: Maximizing Shareholder Wealth
Thursday, August 06, 2009
Risk Analysis (started @6:15)
“Capital budgeting is vital in marketing decisions. Decisions on investment, which take time to mature, have to be based on the returns which that investment will make. Unless the project is for social reasons only, if the investment is unprofitable in the long run, it is unwise to invest in it now. Often, it would be good to know what the present value of the future investment is, or how long it will take to mature (give returns). It could be much more profitable putting the planned investment money in the bank and earning interest, or investing in an alternative project. (University of Phoenix, 2002 )” In the Capital Budgeting simulation, Silicon Arts Incorporated (SAI) was in a strong financial position with plans to pursue growth options that would allow them to increase their market share and keep pace with technology. This paper will discuss valuation techniques associated with SAI’s investment strategies as well as analyze their associated risks.
Valuation Techniques
From the simulation, SAI had the option to pursue two paths to meet the desired growth goals. The first path was an internal investment option centered around expanding their existing Digital Imaging market. The second path was an external investment option that would allow them to enter the Wireless Communication market. After some careful analysis, the growth path for SAI would eventually be decided based on the results of one of the following valuation techniques: Net Present Value (NPV), Internal Revenue Review (IRR), or Profitability Index (PI).
Net Present Value is the first valuation technique considered in the valuation of the two options being explored by SAI. “The Net Present Value (NPV) of an investment (project) is the difference between the sum of the discounted cash flows which are...