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The capital budgeting simulation presented a company by the name of Silicon Arts Inc. Silicon Arts Inc., is a four-year-old company that manufacturers digital imaging integrated circuits wants to increase their profit share and keep pace with technology. Silicon Arts Inc. is looking to expand by pursuing two objectives: increase market share and keep pace with technology. This paper will discuss the valuation techniques to external investment strategies and internal investment strategies to make a final decision on the project. The decision will be made by analyzing the cash flow projections, opportunity costs, NPV, IRR, and the Profitability Index.
Proposals
Silicon Arts Inc. presented two capital investment proposals to their Financial Analyst to make a final decision. Dig-image proposed the details of setting up a plant in Sunnylane, CA, and the plant would produce the existing range of Silicon Arts Inc. circuits. The project life is estimated to be five years and will make a 30% contribution to Silicon Arts Inc. annual revenue. Silicon Arts Inc. is projected to generate revenues $54 million through the sale of 400,000 chips. The capital outlay plant is around $40 million, and the plant capacity is 10,000 units per day; the cost of capital of 17%.
W-Comm proposed the production of IC 1032 on a commercial scale. The project life is estimated to be seven years, and Silicon Arts Inc will capture 3-4% of the 12.5 million data enabled mobile handsets by the fourth year. Real estate in Santa Clara is the area projected to be used for the first three years. The capital outlay plant is around $18 million which will include the machinery cost and the research development cost. The plant will produce 1000 units per day. The capital outlay plant is around $16 million, and the plant capacity is 3000 units per day; the cost of capital of 18%.
Valuation Techniques involved in the External Investment Strategies
A merger...