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Iskall Arno Inc. Case Solution & Answer

Iskall Arno Inc. Case Solution

Introduction

Iskall Arno Inc. was established as the 2nd income source back in 1897. Capital budgeting meeting was held in January 1987 called Iskall Arno Inc.  The purpose of the meeting was to take a decision of the foreseeable business expansion and allocation of budget for the enhancement of safety, pollution control, preventive maintenance, improving efficiency and replacement of equipment. Eleven projects were discussed in the meeting and the available budget amounted to $208 million for the business expansion. The business drivers were recognized concerning the budgeting of capital during meeting. The identified business expansion drivers included operation excellence, expansion and product diversification.

The Dilemma

The ultimate concern of the corporation was to expand the business operations within the available allocated budget i.e. $80 million. Any excessive capital budget needed for the business expansion had to be approved from the board of directors, also it is noteworthy that the allocated budget was not enough for the overall proposed projects. The selection of project was to be based on the consideration of how much the budget must be allocated to projects.

Iskall Arno’s Financial Strategy

The financial strategy that Iskall Arno should have had gone forward with should’ve included key consideration which includes; the business should effectively plan management and usage of the company’s financial resources in order to successfully attain the common goals of business and return maximum value to the company’s shareholders to retain them over the long run. The company should select viable project in terms of their core competencies, having internal potential for implementing project and having lower level of risk associated with the project of the incremental risk level.

Ranking of Projects – Project Analysis

  1. Truck Fleet and New Plant    
Truck fleet New plant
Cash flows $7.70 $23.75
Risk adjusted NPV (3.12) 0.43
IRR 7.8% 11.3%
Factual project Yes Yes
Core competency No Yes
Internal potential Yes No
Project risk Low Low
Incremental risk High High

For company, the core competency was not the distribution, thereby it was significant for the company to outsource entire distribution department in order to make regular deliveries and to ensure the good distribution coverage.

  1. Expand plant and R&D project
Expand plant R&D project
Cash flows $7.25 $22.5
Risk adjusted NPV 0.23 2.07
IRR 11.2% 17.3%
Factual project Yes No
Core competency Yes No
Internal potential No Yes
Project risk Low High
Incremental risk Medium Low

Considering this project, Iskall Arno would’ve most likely increased sales via additional unit production. The riskiness of project could’ve been assessed in term of real results since it was not grounded on the numerous numeric facts. It could’ve recommended to the company at that time that the company needed to take some serious actions on this project as there was a likelihood that the market rivals would maximize their market share by putting a major emphasis on the R&D department.

  1. Conveyer system & pollution tap
Conveyer system   Pollution tap
Cash flows $5.25
Risk adjusted NPV (1.04)
IRR 8.7%
Factual project Yes Yes
Core competency Yes No
Internal potential No No
Project risk Low Low
Incremental risk High Medium

 

Even though the project had been quantified but in contrast, it had some issues in terms of high possibility of increasing lawsuit in case of any injury. Currently, any sort of negative publicity could not have been afforded by company due to the current situation of that time. The company should have paid additional attention to this project although it did not show any positive cash flows…………………..

 

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