Risk Analysis on Investment Decision for SAI

Risk Analysis on Investment Decision for SAI

As the potential for growth and expansion is presented to a company, management must analyze the best scenario to capitalize on those opportunities. With Silicon Arts Inc. (SAI) currently going through a strong economic and financial phase, their management is in a position to either expand their market presence in digital imaging integrated circuits or venture into the wireless communication market. While SAI has the potential to endure growth within either business sector, SAI’s management is faced with the task to analyze and select which investment will deliver the highest value and lowest risk to the company’s overall budget.    
With SAI currently being one of the premier companies within the digital imaging market, the company has the opportunity to grow over the next few years. The analysis on the current economic trend indicates that the digital market will grow by over 20% over the coming year. Although the projection may be excessive, the forecast should be taken as an opportunity for SAI to evolve in the industry. While SAI should see the growth projections as an opportunity, their management needs to evaluate the worst case scenario. Suppose that the forecast is over estimated and that the real grow will be around 10% in the first year, SAI could be left with an excess in production. Such scenario may result in inventory increase and outdated products. On the other hand, by deciding to expand and invest on their digital imaging business line, SAI will have the opportunity to expand and sophisticate their production facilities and in the process upgrade their current operating efficiency.  
Another area which SAI needs to address is costs associated with the expansion of its digital imaging venture. The company must analyze its sunk costs incurred with new plant and machinery against the minimum increase in sales needed to break even. Although negotiating machinery and plant costs can gradually reduce sunk costs, SAI needs to be cautious of...