Risk Analysis on Investment Decision
In Capital Budgeting Simulation, Net Present Value (NPV), Internal Rate of Return (IRR), and Profitability Index (PI) can be analyzed two mutually exclusive capital investment proposals. Silicon Arts Inc. (SAI) is a four-year-old company, manufactures digital imaging integrated Circuits (ICs) that need to analyze two capital investment proposals to pursue its growth plans. "SAI’s Chairman is planning to increase market share and keep pace with technology, which can be done by either expanding the existing Digital Imaging market share or entering the Wireless Communication market," (Simulation, UOP). An analysis reveals that an expansion into the Wireless communication can be beneficial than Dig-Image. However, a number of risks, internal and external are inherent in joining this industry. This paper will analyze investment risk decisions and mitigation of risks by using a number of strategies.
One risk associated with cost of capital in W-Comm proposal will be excess real estate at the Santa Clara plant that can be used the cost of capital $18 million in the first three years. “Cost of capital is the rate of return that SAI could be able to earn at the same risk level as investment that has been selected” (Ross-Westerfield-Jaffle, 2004). SAI can mitigate this risk through liquidity enhancements by bringing uninformed investors. Company should use stock splits which makes a round lot more affordable small businesses and uninformed investors by facilitating stock purchases. SAI can be lower its cost of capital and acquiring liquidity by offering its stocks through internet. Direct stock purchase plans and Dividend reinvestment programs in online allow small investors the opportunity to buy securities cheaply, disclose more information and this narrows the gap so that it reduces SAI’s cost of capital.
According to Marketing Research Reports outline, SAI should use the best capital budgeting approach (NPV) that identify cash flows rather than profits, uses all the cash flows and discounts the cash flows properly. Cash flows forecasts for SAI underlying revenues, cost, and after tax cash flows. Sales projections for market forecast can estimate depend on market share, price per product and size of market. It is also considered variable cost and fixed costs. “Variable costs change as the output changes such as direct labor cost and raw materials are variable while fixed costs are measured as cost per unit of time such as time or salaries” (Ross-Westerfield-Jaffe, 2004).
The purpose of this paper is to investigate capital budgeting decision under Galaxy Science Centre (GSC), which is non-profit organization. The need for such an analysis emerges from the case that only provides general information concerning the impact of capital budgeting decisions in the presence of strategic interactions among GSC. We are facing significant problems in different conditions, then through all given figures to make the best recommendations fro GSC.
First of all an analysis of the packaging machine investment’s hurdle rate is required. I will use comparable firm parameters approach to figure out the hurdle rate (WACC) of the firm using the information provided in Exhibit 5. The cost of debt should be calculated using the bond information given in footnote 2 of case under Exhibit 2. The cost of equity should be calculated using the Capital Asset Pricing Model.
Star Appliance is looking to expand their product line and is considering three different projects: dishwashers, garbage disposals, and trash compactors. We want to determine which project would be worth doing by determining if they will add value to Star. Thus, the project(s) that will add the most value to Star Appliance will be worth pursuing. The current hurdle rate of 10% should be re-evaluated by finding the weighted average cost of capital (WACC). Then by forecasting the cash flows of each project and discounting them by the WACC to find the net present value, or by solving for the internal rate of return, we should be able to see which projects Star should undertake.
Therefore, with respect to the first opportunity relating to GPS transmitters, the cost of capital was estimated at 12.64%. Whereas, the weighted average cost of capital for the industry was estimated at 9.614% in which, 3% extra was added, as an extra provision for risk. On the other hand, for the second investment project relating to surveillance Aircraft. In which, the cost of capital was estimated at 8.548%, calculated by considering the industrial average of Beta, and then estimating its cost of
As the company investment is based on the profit generated in last year’s so the budget of the project will be defined after annual report is published which define the annual revenue of this company.
The high-risk, cyclical nature of our business demands a strong financial base. We must retain the capital resources to meet our current commitments and make substantial investments to develop new products and new technology for the future. This objective also requires contingency planning and
The present risk assessment work emerged from my interest in the BRIC countries and the fact that they represent a big part of the world’s economic potential. In the following analysis I will focus on the main economic, political and financial risks in Russia.
Hammond Cards, Inc. is a small player of the greeting cards industry in the United States of America due to the fact that their annual revenues equate to less than 1% of the industry leaders as described in the case. In their effort to stimulate growth, however, Wendy Hammond has employed me to analyze the potential acquisition of another company, Creative Designs. My analysis will firstly look at the main issue behind this acquisition and then further break it down into sub-issues that I will address individually. Since both of these companies follow a different strategy I will evaluate the two different companies and discuss the implications of their strategies on the merger. I will then perform various cost analysis to determine the cost structures of the two firms which will help me identify whether Wendy’s intentions can be carried out. In my analysis I will aim to figure out the practical capacity of the firms and get an indication on whether their current operations are using the optimal level of capacity and minimizing waste. This data will help me with my strategic recommendation of acquiring Creative Designs and fitting it in with the current strategy of Hammond C...
Disappointment in financial risk management takes various structures, the greater part of which are exemplified in the present emergency. For instance, risk appraisals are regularly taking into account chronicled information, for example, changes in house costs after some time. Yet, fast financial advancement, including securitized subprime contracts, has made such information untrustworthy. Also, a few risks are missed on the grounds that they are covered up in excessively complex reports that leaders cannot get it (Stoian & Stoian, 2016).
To maximize optimum performance of our investment portfolio, we placed a certain percentage of equity in different sectors of the stock market.
Risk taking has been a topic of great importance because it plays a role in determining how people view themselves and their lives. Researchers have concentrated on how different types of risk taking such as health risk or recreational risk can be strongly correlated with specific behavior such as the Five Factor Model personality traits. The concept of risk taking tendency has significant connections for the theoretical modeling of risk behavior, which will provide efficient insight behind individuals reasoning for risky behaviors (Nicholson, Soane, Fenton- O’Creevy, & Willman, 2005).
A cross functional team of marketing experts, engineers and cost accountants determine the cost of a product early in the design and development phase based on what customers desire in a product and what they are willing to pay for the new product. Implementing this market oriented approach enables firms to set the desired profit margin early if not prior to the product development process. Two methods are used to set target cost: subtractive, addition. Subtractive is the method of determining the sales price and subtracting the desired margin to arrive at the target cost. Addition is the method used when the sum of all cost plus the desired margin provide the firm the target cost. Target costing is often subdivided into
The final model used to compute the cost of capital was the earning capitalization model. The problem with this model is that it does not take into consideration the growth of the company. Therefore we chose to reject this calculation. The earnings capitalization model calculations were found this way:
This paper will reflect on the different uses of Project Risk Management and ways in which it can benefit organizations to have the ability to identify potential problems prior to the problem occurring. Risk, this is not something to be taken lightly whilst dealing with matters that include high end projects meeting specific details, deadlines and expectations for the end client. Project risk management teaches one to be aggressive early on in the phases of planning and implementing the tools for a project. This is usually easier as costs are less and the turnaround time to solve the issues at that present moment is beneficial rather than later. The result in a successful project for one’s self and other key people involved in the process is also another requirement. Stakeholder satisfaction is important because the
During the last few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program that had been proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Harry Davis’s cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task.