Iskall Arno Inc Abridged Case Solution

1. Project 1, 2 and 3

This combination includes expanding the fleet size coupled with a new plant and expanding the existing plant capacity as a result of the increasing need in the South-Eastern region. The combined synergies through the combination of these projects will be $0.75 million limited by the total amount of $5 million. The combined capital outlay along with the investment in working capital required the total $62 million, substantially lower than the budget constraint of $80 million. The net present value of the combination turned out to be $0.52 million whereas the average payback was around six years.

2. Project 1, 2, 3 and 9

This combination included the idea of launching a new product line along with the opportunities discussed in the previous combination. The idea of including the launch of the new product fully utilizes the amount of budget constraint imposed by senior management. It is due to the increase in the capital outlay of $15 million along with the initial need for working capital of $3 million. It would further increase the value of synergies by around $2.25 million for the combination as a whole while remaining in the limit of $5 million. The average payback for the combination turns out to be five years which is a year earlier than the previous combination. Moreover, the equipment needed for Project 9 will be depreciated completely in seven years, and this would give Iskall Arno Inc. ample time to think about further reinvesting in the project. The net present value calculated through this combination was $18.55 million which is way greater than the value calculated in the previous combination. Moreover, the IRR of the project was calculated as 16.9% due to the high IRR of Project 9. The IRR of the entire project is reasonably greater than the average risk-adjusted discount rate for the combination, thus, making it a safer investment.

3. Project 1, 2, 3 and 10

This combination will make use of the benefits sought by new plant and truck fleet by fulfilling the increasing demand created through project ten i.e. Ad campaign. This combination will make use of about 96% of the budget, as it would require a $70m initial outlay along with the investment in working capital of $7m. The increased value of combination due to the synergies between different projects would be approximately $2.25 million. The major effect of the marketing campaign will last for three years as proposed by the vice-president marketing division. It is evident by the free cash flows projection for three years only, after which there would be a need for further reinvestment. The average payback for the combination is around five years whereas the NPV calculated is $4.67 million. Since the payback for the ad campaign is shorter than other projects; its IRR is calculated as 24.7%. It leads to the average IRR of the combination of 13.3% that is greater than the average risk-adjusted discount rate.

4. Project 1, 2 and 7 or 8

This combination either with Project 7 or Project 8 has more or less similar effects. It is due to the benefits reaped from the expanded fleet size and expanding the plant capacity in the South-Eastern region. Project 7 and 8 requires expanding the market to Eastern or Southern region respectively. The combination synergy with either project is the same i.e. $3 million. Both combinations require the initial investment of $72 million including capital outlay and investment in working capital. Similarly, the average pay-back for either combination is around five years. The NPV and IRR calculated with Project 7 is $23.62 million and 19% respectively whereas with Project 8 it is $21.02m and 18.1% respectively. This difference creates a deciding line between both alternatives and the final decision depends upon the further future prospects with either of these projects.

5. Project 1, 2 and 9

This combination quite similar to the second combination, however, does not propose building and expanding the plant at the same time. This combination rather focuses on building a new plant along with launching a new product line leading to saving $10 million in initial investment. Despite negative NPV with project 1, the overall combination will yield NPV of $16.48 million with an average payback of 5 years. Similarly, due to the high IRR of Project 9 on an individual level, the combination will be able to generate an IRR of 17.1% that is far greater than the average risk-adjusted discount rate.

6. Project 1, 2 and 10

This combination is amongst the least effective ones. Project 1 and Project 10 will only generate cash flows for seven years and three years respectively. Despite a benefit of $2m due to synergies, the combination will result in negative NPV of $2.35 million. Since this combination won’t add value to the company, its acceptance is least likely.

7. Project 2, 3, 7 and 10

This combination would benefit from the increased production capacity due to the building of a new plant facility and expanding the existing facility in the South-Eastern region. Moreover, with the expansion of the market base towards the eastern market coupled with the launch of the advertising campaign, the combination will be benefitted most due to resulting synergies of $4.75 million. On the other hand, the total initial investment required by all four projects will be $75m expected to be payback within five years. The most distinguishing feature of this combination is its high NPV of $26.49 million as compared with other combinations. This combination will yield an IRR of 19.9%.

8. Project 2, 3, 8 and 10

This combination quite similar with the previous one, apart from expanding in an Eastern market base, it focuses on expanding towards the Southern market base. Similarly, the resulting synergies and initial investment are the same as that of previous combination i.e. $4.75 million and $75 million respectively.