Risk Analysis on Investment Decision

Risk Analysis on Investment Decision

Risk Analysis on Investment Decision
The task at hand was that finance managers need to consider more than the forecast / estimate.   The forecast of capital investment proposals needed to be reviewed and understood.   All scenarios probabilities needed to be considered and their outcomes will fare under different the circumstances.   The manager have to give an estimate of revenue or cost in a particular scenario and see the impact on net present value, and interest rate of return.   This scenario provides insight to the cause and affect of capital planning.
In the simulation, I was trying to measure the net present value, interest rate of return, and the profitability index in order to compare two mutually exclusive capital investment proposals.   I then tried to analyze their cash flow statement and then I examined the assumption made while predicting sales, price, and marketing cost for the proposals.   Next, I tried to check whether the capital expenditures scheduled planned are optimal and then check the accounting for hidden cash flows.   I tried to accommodate for risk inherent in the proposals.   Finally, I leveled the cash flow stream of the two proposals using annuity calculations.  
Objective.   SAI’s Chairman Hal Eichner had revealed his two point agenda for the company: increase markets share and keep the pace of technology.   In order to meet this two point agenda there are to options available: expand the existing Digital Imaging market share or   enter the Wireless Communication market.   Hal’s special task force has prepared cash flow projections for both options.   Both of the options will require the cost of capital taken of 17 to 18 percent.  
Analysis.   In the scenario Chief Financial Officer (CFO) Kathy Lane wanted me the finance manager to examine the probable future scenarios that will affect the operating cash flow figures of the two proposals.   The Markets Research department has compiled a report on the future scenarios at Kathy’s...