Risk Analysis on Investment Decisions - 1436 Words

Risk Analysis on Investment Decisions Investment techniques used in corporate finance when making decisions on projects usually focuses on cash flows of the firm (Ross, Westerfield, and Jaffe, 2004). Because of drastic changes in the business environment over the last decade, managers are requesting better, more accurate information, and improved techniques to meet company needs for making major decisions with data consisting of clear goals, a planned design, high ethics, revealed limitations, adequate analysis, and justified conclusions (Cooper and Schindler, 2003). In this paper, the methods of net present value and internal rate of return are examined based on real-world capital budgeting decisions. This paper also gives insight on†¦show more content†¦The choice between the methods does not affect after-tax cash flows of the firms. The difference between the value of the combined firm and the sum of the values of the firms as separate entities is the synergy from the acq uisition (Ross, Westerfield, and Jaffe, 2004, p. 802). The acquiring firm generally pays a premium for the acquired firm. One reason for acquisition of another company is that a combined firm generates greater revenues. Increased revenues may come from marketing gains, strategic benefits, and market power. Mergers and acquisitions produce greater operating revenues through improved marketing and the shareholders of the acquiring firm will gain if the synergy from the merger is greater than the premium (Ross, Westerfield, and Jaffe, 2004). Benefits of an acquisition derive from revenue enhancement, cost reduction, lower taxes, and lower cost of capital. Risks Associated with Investment Decisions Capital budgeting must be placed on an incremental basis, ignoring sunk costs and considering both opportunity costs and side effects. As the company expands, working capital rises over the early part of the project, with all working capital recovered at the end of the project. All inventories is sold by the end of the project, the cash balance is liquidated, and all accounts receivable are collected, generating cash from other sources in the company, hence cash outflows. If working capital is at a high level, there will be no cash outflow overShow MoreRelatedRisk Analysis on Investment Decisions955 Words   |  4 PagesRisk Analysis on Investment Decision Silicon Arts Inc. (SAI) is a four year old company that manufactures digital imaging integrated Circuits (IC’s) that are used in digital cameras, DVD players, computers, and medical and scientific instruments. Hal Eichner, SAI’s Chairman, has a two-point agenda for the company to increase market share and keep pace with technology. As the Financial Analyst for the company one must analyze two mutually exclusive capital investment proposals. The two optionsRead MoreRisk Analysis on Investment Decision1101 Words   |  5 PagesRisk Analysis on Investment Decision Net present value, internal rate of return, and profitability index are measures used to compare two mutually exclusive capital investment proposals. SAI wants to increase market share and keep up with technology, which can be done by either expanding their existing Digital Imaging market share or by entering the Wireless Communication market, (UoP, 2007). Both alternatives have areas of opportunity as well as potential risks that the company will have toRead MoreApplication Of Management Accounting Theories Essay1541 Words   |  7 Pagesinfluence one company’s decision making process, evaluation process, performance estimation and investment management. This report will emphasize two important areas which are investment appraisal and variance analysis which are used to make the decision and estimation. 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