Investments Case – Silicon Arts Inc
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Every financial decision targeted to achieve the firms overall goal. Maximizing shareholders wealth is also known as maximizing the market value of the firm for its shareholders. The efficient of financial management is determent by the success of the firm. The shareholders wealth maximization goals stated that management should attempt to maximize the net present value of the expected future cash flow to the shareholders of the firm. For instance, Silicon Arts Inc. (SAI) – is a company that manufactures digital imaging Integrated Circuits with two main long-term goal. One is to increase market share and second is to be on top of technology. Silicon Arts has a way to meet its goals by ether expand the existing digital imaging market share by choosing Dig-image company or enter the wireless communication market with W-Comm.
Dig-image is a five year project and with 30% contribution to SAIs annual revenues during this period. The capital outlay for the plant is approximately $40 million, cost of capital is 17%. On the other hand, W-Comm, is a seven year project that specializes in the production of specific chip used in data used by mobile phones. During this period SAI will capture about 3-4% of the 12.5 million data enabled mobile handsets market by year 4 and this will increase over the life of the project. The cost of capital is 18%.
A new Financial Analysis must choose the proper strategy. Establishing price, marketing cost and expected sales value of the project involves the estimation of incremental cash flow over the life time of the project discounted ate that reflects both NPV and IRR and determents the risk of the project. The investments today will determent the firms future strategy, “there is the simple time-value-of-money argument in a riskless world. If you have a dollar today, you can invest it in the bank and receive more than a dollar by some future date. Second, a risky dollar is worth less than a risk less dollar (Ross, Westerfield, Jaffe, 2005)” When NPV is positive then the project adds value and it must be considered. It is the case for both companies, Dig-image NPV -3,118 with 21.20 IRR and W- Comm. NPV 4,655 with 23.00 IRR. As one can notes NPV and IRR for W-Comm. are bigger, this will add greater contribution to the value of the firm and its shareholders wealth. Dig-image shows fewer changes in its cash flow statements and marketing cost does not expected to have a major impact on the sales volume in last two years of the project.
Capex details for Dig-image considers two options, Hathaway Industrial Systems and 6C systems, are current venders. The firm has a reputation for its ability to provide post sales support and technical assistance. Hathaway Industrial Systems and 6C Systems, have helped SAI on its existing units and would like to serve as vender on this unit as well. The discount rates will fall at $ 1 million per 5% reduction in the initial payment. Then there is J&T who is a well-known multinational turnkey contractor. J&Ts offes 5% discount for 70% payment will fall in the rate of 1% per 4% reduction in the initial