Capital Budgeting and Capital Structure Decisions



Capital Budgeting and Capital Structure Decisions

Introduction

In the capital budgeting simulation, several risk associated with SAI were presented. The company's goal is to increase their share of the market while staying in tune with new technology. A review of the cash flow projections show opportunity costs, Net Present Value (NPV), and Internal Rate of Return (IRR) for each option (John Graham and Campbell Harvey 2002). These reviews illustrate a more practical investment choice is for SAI to enter the wireless communication market. The internal and external valuation techniques will be used to discuss risks associated with the proposed investment resolution to accept or further develop a particular project. In this paper we analyzed the Capital Budgeting and Capital Structure Decisions of Silicon Arts.

Company overview

Silicon Arts, Inc. (SAI) is a four year old company which manufacturer's digital imaging integrated Circuits which are used within 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 SAI, one of the duties performed is to analyze the two mutually exclusive capital investment proposals. The two options are to expand within the existing Digital Imaging market share or enter the Wireless Communication market (Michael Brower 1999).

External Investment Strategy Techniques

An analysis of the external investment strategies shows that an expansion into the wireless communication market can increase revenue. A good external investment strategy that will increase revenue is to merge or acquire another company in the industry. The basic strategy of an acquisition for a company is to generate cash flow. When one company acquires another company, the acquiring firm chooses the legal method, the accounting method, and the tax status. Consolidation, acquisition of stock, and acquisition of assets are the three basic legal procedures that a company can use to attain another (Ross et al, 2005). Mergers and acquisitions are taxable or tax-free transactions, thus allowing each selling shareholder to pay taxes on the stock's capital appreciation in a taxable transaction, although they do not pay taxes during the period of the tax-free acquisition. Mergers and acquisitions accounting involves a choice of the purchase or the pooling-of-interests methods with most financial managers preferring the pooling-of interests method because “net income of the combined firm under this method is higher than it is under the ...