ZANCO INVESTMENT PROPOSAL Case Solution
On the other hand,the price paid for that item may be lower or higher than the fair value of the item. The fair market value is the estimated value that can be obtained which is the opposite to the real situation. The amount paid maybe affected by the considerations made by the buyer and seller including some arrangement on payment (terms and conditions) and etc. Thus, the paid price might be not same as FMV.
Under the management case, the IRR for investors will be 30.64%. Since the ABC private equity will need minimum of 20% of IRR, therefore this case shows that the acquisition is highly feasible.
The IRR for the Mezzanine will be 16.4%, which will be higher than the required IRR of 15%. Thus, in the managementâ€™s case, both parties, which are investors and creditors, will be satisfied.
Under this case, the resulting IRR is calculated to be 24.22%, therefore it could be said that it is more than the required 20% IRR. However, there is a decrease of about 6% in IRR as the case and assumption changed from the managementâ€™s assumptions.
Under this case, the resultingIRR for Mezzanine is 14.4%,whichis slightly lower to the minimum IRR required for the decision to accept for providing funding or not.
This is the worst case with the possible worst scenario and assumptions, therefore the rate of return for investors will become unacceptable which is only 13.18%. On the other hand,the expected Rate of return for Mezzanine will be 11.7%. Therefore,if the worst scenario is faced by the company, then there would beabout 7% less IRR expected for investors as compared to estimated target IRR. Moreover,for Mezzanineâ€™s IRR, the difference between the estimated target and estimated IRR will be 3.3% negative.
All three scenarios should be incorporated in the discussion with the management as well as bank sothat they will be aware of the overall situation and probable result. The worst case would provide them information to analyze what will be the effect of the worst scenario andhowthis will affect their decision. Whether the acquisition is still favorable or not, as well as they can analyze the potential of their risk bearing abilities. Different considerations can be made and terms and conditions might also be affected by such future possibilities. If even the worst case is bearable, then they can still go for acquisition.
Could you prepare a short list of reasons why your fund should or should not proceed with this investment? Which are the crucial elements you should monitor in the future in order to maintain your IRR expectations?
Positive Reasons (in favor of investment)
Some of the positive reasons that confirm the feasibility of the project using data provided are:
- The management team of Zanco is highly efficient and experienced. This has significant effect on the operating performance of the business. Thus the company has high potential to grow with increasing returns on the investment.
- Due to globalization, thereis a great opportunity for the company to expand and to increase its growth. Moreover, thecompany has been expanding across border and has strategy of internationalization.
- There is the lowestprobability of failure asthe business sector is in high business. However, thereis developed market for the business.
- The company is earning at anormal rate prevailing in market, which isearned by other companies in the sector.
- The company has been a dominating player in the market segment.
- Product diversification can easily be made as per the circumstances,thereforethis will make the company more flexible.
It is a crucial factor that the market condition will remain the same for the company in the future as well. However, there is a probability of high recession or intense competition which would make the company less profitable. Another aspect that should be monitored is to have motivated management team as well as it is necessary to retain the skillful employees. Future incentives should be attractive enough to retain the management team, which is the key for successful operations as efficient operation will result in higher profitability………………..
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