The Silicon Arts simulation provided an overview of a company trying to make choices between two cash flows for future business investments. The simulation analyzed cash flows using the ratios of Net Present Value [NPV], Internal Rate of Return [IRR], and Profitability Index [PI]. However, there were also other factors that needed further analysis such as expected risks by the type of volume expected for production and a new plant launch as well. The scenario was a good overview of the concepts and showed the types of decisions Silicon Arts needed to make to turn around their business from the 40% slowdown in the electronics industry.The whole analysis was centered on an ROI calculation for each option.
“Performing an ROI analysis allows your organization to evaluate strengths and weaknesses within…, so that it will remain competitive in the market” (AIIM E-DOC, CH 4, PARA 3).
The scenarios took into account the NPV, and although not specified, I made an assumption they had an IRR of 20%, and a PI guideline of 1.2 was my other assumption. Once the scenario was performed these were the first results:Based on these results Silicon Arts may have considered performing both product launches since growing the cash flows would be a key factor for offsetting the industry decline. This was the assumption using high volume predictions for the options.
Out of curiosity when the scenario is performed using default volumes, the results come out quite a bit different. This is because of the relationship of cost for introducing a new plant into manufacturing. The Dig-image deal seems like a better investment because it does not require the launch of a new manufacturing plant. The W-comm deal is highly dependant on volume to be just as good a deal for Silicon Arts.While researching ratios I found an interesting index known as the Diminishment Index. “The DI itself is a criterion of profitability like the B/C ratio and subratios of the DI also describe the safety or risk of the project” (Lee et al, 2004, PARA 3).
The equation for this index is as follows:This index takes into account liability on return and the equity to liability ratio. This makes it a little more robust in regards to risk versus the simulation which only asked for a best guess estimate of 1% to 3% based on user opinion. Both investments are a very good value and should be considered for dual implementation. “Over the long term [,] value trumps growth” (Dreman, 2005, PARA 4).