You are on page 1of 37

UVA-F-0814

ISKALL ARNO, INC. (Abridged)

Opportunities for business expansion were the discussion focus at the capital-budgeting
meeting at Iskall Arno on January 15, 1987, but the question also arose of how much of the firms
capital budget to allocate to preventive maintenance, equipment replacement, safety enhancement,
pollution control, and efficiency improvements. Because Iskall Arno used a three-year budgeting
cycle, no other major requests for funds would be considered for another three years, although
minor, emergency requests would be considered from time to time.

The Company

Iskall (pronounced eese-kall, Swedish for Icy Cold) Arno, Inc., was a regional producer of
high-quality Frysais (pronounced freesa-eese) ice cream and Fruktis (pronounced frukt-eese) yogurt,
as well as Fjord Ice bottled water, and the Swedish Pride line of fruit juices. The company was
headquartered in Rochester, Minnesota, and its market extended southeast through Indiana and as far
southwest as Nebraska. Frysais ice cream, the companys flagship product, had a loyal regional
customer base who preferred it to its competition for its extremely high butterfat content, large
chunks of chocolate, fruit, and nuts, and wide range of flavors. The company had never marketed its
products outside the midwest.

The company was founded in 1897 as a second source of income by Arno Svalbard, a
Swedish immigrant to Minnesota who worked as a wheelwright. He had hoped that he could earn at
least enough to send the eldest of his three sons, aged 12 at the time, to college. Over the next 10
years, the business outgrew the Svalbards basement and then the small shop he had rented, as
people outside the Swedish neighborhood discovered the ice cream; all three sons and both
daughters attended St. Olaf College. The company went public in 1967, and by 1986, Iskall Arno
had sales of almost $600 million. Ice cream was responsible for 60 percent of the companys
revenues; yogurt, which was introduced in 1977 and spurred company sales growth over the next
several years, contributed about 20 percent. The remaining 20 percent of sales was divided equally
between bottled water and fruit juices.

This case was prepared by Professor Robert F. Bruner. It was written as a basis for class discussion rather than to
illustrate effective or ineffective handling of an administrative situation. Copyright 1988 by the University of Virginia
Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to
sales@dardenpublishing.com. No part of this publication may be reproduced, stored in a retrieval system, used in a
spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or
otherwisewithout the permission of the Darden School Foundation. Rev. 4/96.
-2- UVA-F-0814

After 1985, as shown in Exhibits 1 and 2, the companys growth had slowed; with sales
holding steady at about $585 million a year. The slowdown was believed to have been caused by
low population growth, market saturation in some areas, and, according to some, a weak advertising
campaign. Most members of corporate management now wanted to expand the companys market
presence to boost its sales. These managers also hoped that increased market presence and sales
would improve the companys market value. In 1986 Iskall Arnos stock traded at prices of 11 to 12
times earnings.

Resource Allocation

Typically, management used the companys historical cost of capital10.6 percent1as the
hurdle rate for relatively risk-free maintenance and efficiency-enhancing requests. No firm
guidelines were in effect, however, for determining the reward that should be expected of riskier
projects. The Capital Budgeting Committee relied strongly on intuition, only implicitly using
different hurdle rates to ferret out the more worthy prospects. The committee consisted of the five
divisional vice-presidents and the corporate treasurer, controller, president, and chairman.

The committee was also composed of a broad range of personalities. The president and
chairman were both members of the Svalbard family, and both were considered very conservative
by the rest of management. Most other members of management, especially the vice-presidents,
believed that past budget requests to finance expansion, whether in the form of a new market or a
new product, had to have inordinately high expected returns to satisfy the Svalbards. They were
sure this year would be no exception. On the other end of the spectrum, the vice-president of
strategic planning was considered by most to be extremely aggressive. Over the past five years, his
largest proposals had been overruled, and he was becoming frustrated with what he perceived to be
his lack of power within the organization.

Iskall Arnos 9-member board of directors, 4 of whom were members of the Svalbard family,
wanted to maintain a 30 percent payout ratio and a long-term debt-to-equity ratio of no more than 50
percent. Currently the firms debt-to-equity ratio was 45 percent. The board expected the cost of
debt to rise at the rates shown in Exhibit 4 if leverage were to increase. Sales were expected to
increase to about $650 million in 1987, causing net income to rise to about $26.75 million. Based on
these projections, the board of directors authorized the capital budgeting committee to fund a total of
up to $80 million worth of projects over the next 3 years; any amount above $80 million would
require special board approval.

In the January meeting, the 5 divisional vice-presidents presented their proposals to the
committee. They were:

1
This figure had been computed 15 years ago and was reviewed by senior management every few years. The firm's
current beta in 1987 was 1.00.
-3- UVA-F-0814

Total Sponsoring
Project Outlays Vice-president

1. Expand the truck fleet $22 million Distribution

2. Build a new plant 30 Production

3. Expand a plant 10 Production

4. Invest in R&D 15 Production

5. Install conveyer systems 14 Production

6. Install a pollution trap 4 Production

7. Expand the market eastward 20 Sales

8. Expand the market southward 20 Sales

9. Create and test market a new


product line 18 Sales

10. Create a new advertising


campaign 15 Marketing

11. Build a theme park 40 Strategic Planning


$208 million

The requests totaled over $208 million, well in excess of this self-imposed budget limit of
$80 million. The committees task was to determine the relative urgency and likely success of the
proposals. Exhibit 5 presents the cash flows and completed investment analysis of the proposed
projects. A project was approved if seven of the nine committee members voted in its favor.
Exhibit 5 assumes three leverages: corporate leverage, project industry average leverages, and a
maximum debt-to-equity ratio of 100 percent. The exhibit relevers the betas for the appropriate
leverage ratio, calculates a cost of equity and cost of debt, and derives a weighted average cost of
capital, net present value, and profitability ratio.
-4- UVA-F-0814

The Proposals

1. Expand the Truck Fleet

The vice-president of distribution requested that the company purchase 100 new refrigerated
tractor trailers, 50 each in 1987 and 1988. By doing so, the company could sell 60 old, fully
depreciated trucks over the two years for a total of $1.2 million. As a result, the fleet would be
expanded by 40 trucks within two years.

This vice-president pointed out that the expansion would allow more efficient routing and
servicing of the companys entire fleet and would cut delivery times, and therefore, possibly,
inventories. In addition, it would allow more frequent deliveries to the companys major markets,
which would mitigate the loss of sales. As shown in Exhibit 5, the total net investment in trucks of
$20 million and the increase in working capital to support added maintenance, fuel, payroll, and
inventories of $2 million was expected to yield total cost savings and added sales potential of $7.7
million over the next 7 years. The resulting internal rate of return was estimated to be 7.8 percent.

2. Build a New Plant

Iskall Arnos sales were increasing in the southeastern region of the companys market
beyond the capacity of its Terre Haute, Indiana, manufacturing and packaging plant. At present,
some of the demand was being met by shipments from the companys newest, most efficient facility,
located in Champaign, Illinois, but shipping costs were high, and some sales were undoubtedly being
lost as the marketing effort was curtailed in that region because of the inability to deliver.

The vice-president of production proposed that a new manufacturing and packaging plant be
built southeast of Indianapolis, Indiana, at a cost of $25 million plus $5 million for working capital.
The new, low-cost facility would take the burden off the Champaign and Terre Haute plants. The
$14 million worth of equipment would be amortized over 7 years, and the plant over 10 years.
Through an increase in sales and depreciation and the decrease in delivery costs, the plant was
expected to yield after-tax cash flows totaling $23.75 million and an internal rate of return of 11.3
percent over the next 10 years.

3. Expand a Plant

In addition to the need for greater production capacity in Iskall Arnos southeastern region,
its Sioux Falls, Iowa, plant had reached full capacity. This situation made the scheduling of routine
equipment maintenance difficult, which in turn, created production scheduling and deadline
problems.

The Sioux Falls plant serviced the tri-state area that included parts of Minnesota, South
Dakota, and Iowa, as well as the northeastern corner of Nebraska. The plants capacity could be
expanded by 20 percent for $10 million. The equipment ($7 million) would be depreciated over 7
-5- UVA-F-0814

years and the plant over 10 years. The increased capacity was expected to result in additional
production of up to $1.5 million per year, yielding an internal rate of return of 11.2 percent.

4. Invest in Research and Development

Recent developments in the synthesis of artificial sweeteners were showing the promise of
significant cost savings to food and beverage producers. The sweeteners were not necessarily low in
calories, but they were inexpensive. The key was to create the right flavor to complement or
enhance the other ingredients. For ice cream manufacturers, the difficulty lay in creating a balance
that would result in the same flavor as was obtained when using sugar or corn syrup. There was also
the possibility of creating a superior taste.

The vice-president of manufacturing passed on a request from Iskall Arnos R&D manager
for $15 million to devote to this matter. Initial indications and past experience with other types of
sweeteners suggested that good results could be reached within 3 years and that after-tax cost
savings would be between $3.0 million and $6.5 million, depending on the level of sales and the
extent to which the artificial sweeteners were used to replace sugar and corn syrup. The overall
internal rate of return was projected to be 17.3 percent. He also stressed that the proposal, although
highly uncertain in terms of actual results, could be viewed as a means of protecting present market
share, because other quality ice cream producers carrying out the same research could develop
products the market would consider superior.

5. Install Conveyer Systems

The vice-president of manufacturing also requested $14 million to modify the conveyer
systems in the companys 18 older manufacturing and packaging plants. Iskall Arno had 20 plants,
and the last 2 built had included complete conveyer systems that eliminated the need for any heavy
lifting by employees.

The system had two advantages: it reduced the chance of injury, and it was more efficient. In
the recent past, an average of 75 missed worker-days per year per plant were directly attributable to
muscle injuries sustained in heavy lifting. At an average hourly wage of $14 per hour, over
$150,000 per year was thus lost; and there was always the possibility of more serious injury and a
lawsuit. In addition, the conveyers could work more rapidly than manual moving, which would
reduce bottlenecks and production tie-ups.

Overall cost savings and depreciation totaling $2.75 million per year for the project were
expected to yield an internal rate of return of 8.7 percent.

6. Install a Pollution Trap

Iskall Arno processed its entire line of Swedish Pride fruit juices at its Rochester facility.
One of the first stages of processing involved cleaning the fruit to remove dirt and pesticides. The
dirty water was simply sent down the drain and into the sewer system; all waste water was treated at
-6- UVA-F-0814

the sewage processing facility, but recent Environmental Protection Agency rule changes required
that any waste water containing even slight traces of poisonous chemicals also be treated at the
source. Under current EPA rules, companies had four years to comply.

The vice-president of manufacturing pointed out that a pollution trap could be purchased and
installed for $4 million now or at an estimated cost of $10 million in four years. The company also
ran the risk that a Democratic presidential administration would effectively shorten the compliance
time, with the result that the company could expose itself to penalties of between $50,000 and
$250,000 a year. This request is not shown in Exhibit 5 because it would generate no positive cash
flows.

7 and 8. Expand the Market Base

The vice-president of sales recommended that the company expand its market in one of two
directions: either eastward (Proposal 7) to include Ohio, Pennsylvania, Maryland, Washington D.C.,
and parts of Virginia, or southward (Proposal 8) to include Kentucky, Tennessee, Missouri,
Arkansas, Kansas, and Oklahoma. He believed the time was right to expand sales of ice cream, and
perhaps yogurt, geographically, but that to expand in both directions simultaneously would be too
demanding on his sales organization.

Each alternative had its benefits and risks. If the company expanded eastward, it could reach
a larger population in a smaller area, but there was more competition from other local and regional
ice cream manufacturers. Looking southward, the tables were turned: there would be less
competition, but an area roughly twice the size contained a smaller population base.

At least initially, production for eastward expansion could come from three existing plants
near the Ohio border--Saginaw, Ann Arbor (both in Michigan), and Fort Wayne (Indiana).
Southward expansion could be accommodated through production at three other plants--Lincoln
(Nebraska), Des Moines (Iowa), and Springfield (Illinois). In addition, some market segmentation
could be used to help recoup the larger expenses for shipping to areas that were farther from
manufacturing and packaging plants. For example, along the East Coast and in cities such as Little
Rock (Arkansas), Memphis (Tennessee), and Oklahoma City, Frysais and Fruktis could be premium
priced to test the market. The price could then be lowered as production and distribution sites were
built.

The initial cost of either proposal was $20 million of working capital. The bulk of this
projects costs was expected to involve the financing of distributorships, but over the 10-year
horizon, the distributors would gradually take over the burden of carrying receivables and inventory.
The after-tax cash flows were expected to total $37.5 million for eastward expansion and $32.5
million for southward expansion.

The vice-president of sales pointed out that eastward expansion meant a higher possible
internal rate of return, but that moving southward was a less risky proposition. The projected
internal rates of return were 21.4 percent and 18.8 percent, respectively.
-7- UVA-F-0814

9. Produce and Test-Market a New Product Line--Snack Foods

The vice-president of sales advanced a third expansion proposal, suggesting that the
company use the excess capacity at its Green Bay, Wisconsin, facility to produce a line of dried
fruits to be test-marketed in the Green Bay-to-Milwaukee (Wisconsin) area. He noted Iskall Arnos
strong market presence in eastern Wisconsin and the success of other food and beverage companies
that had expanded into snack food production, most notably Anheuser Busch with Eagle Snacks. He
argued that Iskall Arnos reputation for wholesome, quality products would be enhanced by a line of
dried fruits and that name association with the new product would probably even lead to increased
sales of the companys other products among health-conscious consumers.

Equipment and working capital costs were expected to total $15 million and $3 million,
respectively. The equipment would be depreciated over 7 years. Assuming the test market was
successful, cash flows from the project would be able to support further plant expansions in other
strategic locations. The internal rate of return was expected to be 20.5 percent.

10. Roll Out a New Advertising Campaign

The vice-president of marketing proposed that the company revamp its advertising campaign
to raise customer awareness of its products. The present marketing effort, in place for the past three
years, revolved around a theme designed to appeal to the large Scandinavian population. Some
executives within the company believed the present effort, by attempting to increase sales in an
already saturated market, was weak. The vice-president of marketing suggested that this theme,
rather than being replaced, be supported by an intensive one-year effort to attract the 25-40 age
bracket; it would play on the exotic appeal and premium quality of Frysais and low-calorie Fruktis.

The ad campaign, which would use all major media, would cost $15 million. Its effects
would be felt most dramatically in 1988 and 1989, and would then trail off unless maintained. As
proposed, the projects internal rate of return was estimated to be 16.2 percent.

11. Build a Theme Park

The vice-president of strategic planning saved his provocative suggestion for last. He and
his staff had spent the past two years studying the possibility of building a theme park, and they had
concluded that it would be both self-supporting shortly after completion and would promote the
Iskall Arno name.

The proposed location for Arnoland was a 1,500-acre plot of vacant land adjacent to the
companys manufacturing plant just south of Minneapolis-St. Paul, Minnesota. It was considered
ideal because of its proximity to Rochester, the size of the regional population, and the present
infrastructure of roads and hotels.
-8- UVA-F-0814

The proposal was expensive--$4 million for the land, $10 million for the buildings, and $16
million for the equipment to be spent over two years before the park could be opened and $10
million in working-capital needs. Part of the cost of construction would be applied to modifying the
ice cream factory to accommodate tours, thereby reinforcing the product connection. Arnoland
could be opened in July 1989 if design and intensive construction were begun soon; construction
would then continue over the next two and a half years until completion. Cash flows from the park
would be used to finance construction and meet working-capital needs after the second year.

The buildings would be depreciated over 10 years, and the equipment over 7 years--each
with salvage values of 10 percent of their initial purchase prices. The proposal was risky for a
number of reasons the unusual nature of the project, the relatively short Minnesota summer, the
areas relative lack of tourism compared with other regions where theme parks abounded, the
possibility of development-cost overruns, and the high up-front fixed costs the project required. The
expected returns were high, however: after-tax cash flows were projected to be $134 million,
yielding an internal rate of return of 28.7 percent. In addition, sales of Frysais and Fruktis were
expected to rise through name association and sales at the park. Because any such effect was hard to
quantify, however, it was eliminated from the cash flow projections.

Synergies

As the division vice-presidents and Capital Budgeting Committee reviewed the proposals,
the company chairman, Eric Svalbard, raised the issue of possible synergies between and among
projects. Two other committee members remarked that the same thought had occurred to them, and
the suggestion was made that the projects be considered in groups rather than individually.

The committee quickly realized that significant synergies could result by carrying out two or
more projects in conjunction with each other. For example, anything that was expected to increase
sales would also increase the efficient use of the expanded truck fleet; the relationship was
symbiotic, for an increase in the size of the truck fleet would aid the efforts of any market expansion
or advertising program, as well as any increases in capacity. Similarly, increases in production
capacity would improve the results of any market-expansion program or advertising campaign.
There were limits, however, to how successful each proposal could be, no matter how many others it
complemented, because of size and capacity constraints. Within an hour, the committee had
developed the following list of likely synergistic project pairs:

Truck fleet and new plant


Truck fleet and expanded plant
Truck fleet and eastward expansion
Truck fleet and southward expansion
Truck fleet and advertising campaign
New plant and eastward expansion
-9- UVA-F-0814

New plant and southward expansion


New plant and new product line
New plant and advertising campaign
Expanded plant and new product line
Eastward expansion and advertising campaign
Eastward expansion and theme park
Southward expansion and advertising campaign
Southward expansion and theme park

As the meeting continued and the participants discussed the implications of each proposal for
the others and the possible synergies, rough estimates produced the matrix shown in Exhibit 6. The
positive dollar impact of each proposal on the others and the maximum possible benefits on any one
project based on size and capacity constraints are shown. For example, if the companys market
were expanded eastward and the theme park were opened, the cross-marketing of the two and the
increased awareness of the Iskall Arno name were expected to yield up to $1.0 million a year in
extra revenues.

Similarly, because the vice-president of transportation estimated that cost savings associated
with expanding the truck fleet would be $3.0 million in the second year of the program (Exhibit 5),
the benefit of, say, expanding the market eastward in conjunction with expanding the fleet was
estimated to be an additional $1.25 million per year, to be divided evenly between the two projects.
Fleet-size constraints, however, limited total synergies plus distinct benefits of the expanded fleet
proposal to $5.0 million per year.

The committee used this additional information to rank the proposals, dividing the dollar
results of the synergies 50-50 between any two projects. Of course, three or more projects could
have resulted in even greater synergies. The next several hours were spent creating projected
synergistic cash flows among three or more projects which seemed to be attractive and feasible
combinations, and which totaled no more than $80 million. They are summarized in Exhibit 7 and
given in detail in Exhibit 8, parts A through O, in the following order:
-10- UVA-F-0814

Project Numbers Projects


1, 2, and 3 Truck fleet, new plant, expand plant;

1, 2, 3, and 9 Truck fleet, new plant, expand plant, new product;

1, 2, 3, and 10 Truck fleet, new plant, expand plant, advertising campaign;

1, 2, and 7 Truck fleet, new plant, expand east;

1, 2, and 8 Truck fleet, new plant, expand south;

1, 2, and 9 Truck fleet, new plant, new product;

1, 2, and 10 Truck fleet, new plant, advertising campaign;

2, 3, 7, and 10 New plant, expand plant, expand east, advertising campaign;

2, 3, 8, and 10 New plant, expand plant, expand south,


advertising campaign;

2, 7, and 9 New plant, expand east, new product;

2, 7, and 10 New plant, expand east, advertising campaign;

2, 8, and 9 New plant, expand south, new product;

2, 8, and 10 New plant, expand south, advertising campaign;

7, 10, and 11 Expand east, advertising campaign, theme park;

8, 10, and 11 Expand south, advertising campaign, theme park.

The discount rates applied to the different projects were based on the betas suggested for
each in Exhibit 5. The industry-based leverages and betas were used if the project could be
distinguished as a business unit separate from food processing. The firms weighted average cost of
capital was used for such projects as plant expansion, market expansion, and new product line.

The combined projects were limited to total expenditures of $80 million, as allocated by the
board of directors. If the committee wanted to devote more than $80 million to capital budgeting in
1987, it would have to approach the board of directors for special approval.
-11- UVA-F-0814

Exhibit 1

ISKALL ARNO, INC. (Abridged)

Consolidated Income Statements


(dollars in thousands, except per share data)

For the Year Ended December 31,


1984 1985 1986

Sales $585,681 $584,614 $586,893

Cost of goods sold 425,849 418,967 410,278


Marketing, general, admin. 117,258 124,888 132,432

Income from operations 42,574 40,759 44,184

Interest income 1,078 2,817 5,513


Interest expense (3,561) (4,695) (6,646)
Other, net 2,315 1,215 856

Income before taxes 42,406 40,096 43,907


Tax provision 19,507 18,444 19,757

Net income $22,899 $21,652 $24,150

Earnings per share $1.73 $1.65 $1.83


Dividends per share $0.50 $0.50 $0.54

Price per share, end of year $20.25 $19.50 $20.75


-12- UVA-F-0814

Exhibit 2

ISKALL ARNO, INC. (Abridged)

Consolidated Balance Sheets


(dollars in thousands)

December 31,
1985 1986

Cash and equivalents $69,309 $69,135


Receivables 19,109 26,271
Inventories 49,193 48,088
Prepaid expenses 3,807 4,652

Total current assets 141,418 148,146

Gross plant and equipment 252,373 276,092


Less depreciation (75,336) (89,206)

Net plant and equipment 177,037 186,886

Other assets 7,665 18,116

Total assets $326,120 $353,148

Current debt maturities $2,167 $2,833


Accounts payable 26,682 22,909
Accrued expenses 19,195 18,981
Income taxes 4,301 4,493

Total current liabilities 52,345 49,215

Long-term debt 72,934 76,158


Deferred credits:
Income taxes 48,426 56,664
Pension obligations 3,340 3,186

Total liabilities 177,045 185,223

Common stock 13,143 13,266


Paid-in surplus 15 1,728
Reinvested earnings 135,917 152,931

Total shareholders equity 149,075 167,925

Total liabilities
and equity $326,120 $353,148
-13- UVA-F-0814

Exhibit 3

ISKALL ARNO, INC. (Abridged)

Interest Rates and Yields

3 Year* 7 Year 10 Year


Treasury Note and Bond rate 6.38% 6.91% 7.05%

1926-1986
Geometric Mean Return Arithmetic Mean Return
Common stock 10.0% 12.1%
T-Bills 3.5 3.5
Long-term government bonds 4.4 4.7
Inflation 3.0 3.1

*Given the relatively flat yield curve, analysts assumed that the yield on the 3-year treasury note equaled the 90-day
treasury bill yield.

Sources: Federal Reserve Bulletin; Stocks, Bonds, Bills, and Inflation, 1987 Yearbook, Ibbotson Associates, Chicago, p.
25.
-14- UVA-F-0814

Exhibit 4

ISKALL ARNO, INC. (Abridged)

Expected Cost of Marginal Debt in Relation to Leverage


-15- UVA-F-0814

Exhibit 5

ISKALL ARNO, INC. (Abridged)

Free Cash Flows of Proposed Projects (a)


(dollars in millions)
(1) (2) (3) (4) (5) (7) (8) (9) (10) (11)
Expand(b) Expand(c) Expand(c) New
Truck New Expand R&D Conveyer Market Market Product Ad Theme(d)
Fleet Plant Plant Project Systems Eastward Southward Line Campaign Park

Property $20.00 $25.00 $10.00 $15.00 $14.00 $15.00 $15.00 $30.00


Working Capital 2.00 5.00 $20.00 $20.00 3.00 10.00

Year Expected Free Cash Flows (e)

0 -11.40 -30.00 -10.00 -5.00 -14.00 -20.00 -20.00 -18.00 -12.00 -15.00
1 -7.90 2.00 1.25 -5.00 2.75 3.50 3.00 3.00 5.50 -20.00
2 3.00 5.00 1.50 -5.00 2.75 4.00 3.50 4.00 5.50 5.00
3 3.50 5.50 1.75 3.00 2.75 4.50 4.00 4.50 5.00 9.00
4 4.00 6.00 2.00 3.00 2.75 5.00 4.50 5.00 11.00
5 4.50 6.25 2.25 4.00 2.75 5.50 5.00 5.00 13.00
6 5.00 6.50 2.50 4.50 2.75 6.00 5.50 5.00 15.00
7 7.00 6.75 1.50 5.00 2.75 6.50 6.00 5.00 17.00
8 5.00 1.50 5.50 7.00 6.50 5.00 19.00
9 5.25 1.50 6.00 7.50 7.00 5.00 21.00
10 . 5.50 1.50 6.50 . 8.00 7.50 5.00 . 59.00
$7.70 $23.75 $7.25 $22.50 $5.25 $37.50 $32.50 $28.50 $4.00 $134.00

Corporate hurdle rate 10.6% 10.6% 10.6% 10.6% 10.6% 10.6% 10.6% 10.6% 10.6% 10.6%

Industry debt/equity 63% 54% 54% 25% 54% 54% 54% 54% 34% 32%

Beta(f) 1.20 0.85 0.80 1.15 0.85 0.90 0.85 0.95 1.10 1.20
Beta (unlevered)(g) 0.85 0.63 0.59 0.99 0.63 0.66 0.63 0.70 0.90 0.99

(a) The pollution trap is excluded from this table, because no positive cash flows were associated with it.
(b) $11 million spent initially and at the end of year 1.
(c) Franchisees would gradually take over the burden of carrying receivables and inventory.
(d) $15 million would be spent in the first year, $20 million in the second, and $5 million in the third.
(e) Free cash flow = incremental profit or cost savings + depreciation - investment in fixed assets and
working capital.
(f) Betas are averages from companies in businesses similar to the projects based on their capital structures, from
Value Line Investment Survey, Media General Industriscope, and industry analysts.
(g) Unlevered beta is Beta /(1+ (1 - 0.34) X (industry debt-to-equity))
-16- UVA-F-0814

Exhibit 5 (continued)

Free Cash Flows of Proposed Projects


(dollars in millions)
(1) (2) (3) (4) (5) (7) (8) (9) (10) (11)
Expand(b) Expand(c) Expand(c) New
Truck New Expand R&D Conveyer Market Market Product Ad Theme(d)
Fleet Plant Plant Project Systems Eastward Southward Line Campaign Park

Weighted average cost of capital if debt/equity = .31/.69 (based on book value)

Beta (relevered) (a) 1.10 0.81 0.76 1.28 0.81 0.86 0.81 0.91 1.16 1.28
Rf (b) 6.38% 6.38% 6.38% 6.38% 6.38% 6.38% 6.38% 6.38% 6.38% 6.38%
Rm - Rf 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6%
Ke = Rf + Blev(8.6%) 15.8% 13.4% 13.0% 17.4% 13.4% 13.8% 13.4% 14.2% 16.4% 17.4%
Kd(c) 5.94% 5.94% 5.94% 5.94% 5.94% 5.94% 5.94% 5.94% 5.94% 5.94%
Equity weight 69.0% 69.0% 69.0% 69.0% 69.0% 69.0% 69.0% 69.0% 69.0% 69.0%
Debt weight 31.0% 31.0% 31.0% 31.0% 31.0% 31.0% 31.0% 31.0% 31.0% 31.0%
WACC 12.8% 11.1% 10.8% 13.8% 11.1% 11.4% 11.1% 11.6% 13.2% 14.7%

Weighted average cost of capital if debt/equity = industry average (based on book value)

Beta (industry) 1.20 0.85 0.80 1.15 0.85 0.90 0.85 0.95 1.10 1.20
Rf(b) 6.38% 6.38% 6.38% 6.38% 6.38% 6.38% 6.38% 6.38% 6.38% 6.38%
Rm - Rf 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6%
Ke = Rf + Blev(8.6%) 16.7% 13.7% 13.3% 16.3% 13.7% 14.1% 13.7% 14.6% 15.8% 16.7%
Kd(d) 6.27% 6.11% 6.11% 5.94% 6.11% 6.11% 6.11% 6.11% 5.94% 5.94%
Equity weight 61.3% 64.9% 64.9% 80.0% 64.9% 64.9% 64.9% 64.9% 74.6% 75.8%
Weighted debt cost 38.7% 35.1% 35.1% 20.0% 35.1% 35.1% 35.1% 35.1% 25.4% 24.2%
WACC 12.6% 11.0% 10.7% 14.2% 11.0% 11.2% 11.0% 11.5% 13.3% 14.0%

WACC if debt/equity = .50/.50 (based on book value)

Beta (relevered) (a) 1.41 1.04 0.98 1.64 1.04 1.10 1.04 1.16 1.49 1.64
Rf(b) 6.38% 6.38% 6.38% 6.38% 6.38% 6.38% 6.38% 6.38% 6.38% 6.38%
Rm - Rf 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6%
Ke = Rf + Blev(8.6%) 18.5% 15.3% 14.8% 20.5% 15.3% 15.9% 15.3% 16.4% 19.2% 20.5%
Kd(d) 8.60% 8.60% 8.60% 8.60% 8.60% 8.60% 8.60% 8.60% 8.60% 8.60%
Equity weight 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0%
Weighted debt cost 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0%
WACC 13.5% 12.0% 11.7% 14.5% 12.0% 12.2% 12.0% 12.5% 13.9% 14.6%

(a) Relevered beta = unlevered beta times (1 + (1 - .34) X (debt / equity)).


(b) Risk-free rate of 6.38% is both 3-year and short-term rate.
(c) After-tax cost of debt is 9% X (1 - 0.34).
(d) After-tax cost of debt based on Exhibit 4 and 34% tax rate. Minimum pre-tax rate is 9%.
-17- UVA-F-0814

Exhibit 5 (continued)

Free Cash Flows of Proposed Projects


(dollars in millions)
(1) (2) (3) (4) (5) (7) (8) (9) (10) (11)
Expand(b) Expand(c) Expand(c) New
Truck New Expand R&D Conveyer Market Market Product Ad Theme(d)
Fleet Plant Plant Project Systems Eastward Southward Line Campaign Park

Ave. payback (years) 6 6 6 7 6 5 6 5 3 5


Internal rate
of return 7.8% 11.3% 11.2% 17.3% 8.7% 21.4% 18.8% 20.5% 16.2% 28.7%

Net present value at:


10.6% hurdle rate ($1.92) $0.99 $0.28 $5.21 ($0.87) $11.99 $9.00 $8.95 $1.16 $47.97
Corporate WACC ($3.23) $0.29 $0.19 $2.37 ($1.08) $10.77 $8.29 $7.77 $0.60 $30.75
Industry WACC ($3.12) $0.43 $0.23 $2.07 ($1.04) $11.07 $8.43 $7.88 $0.58 $33.30
50/50 debt/equity ($3.61) ($0.92) ($0.20) $1.84 ($1.45) $9.62 $7.08 $6.76 $0.45 $31.11

Profitability ratio at: (a)


Corporate WACC 82.4% 101.0% 101.9% 117.9% 92.3% 153.9% 141.4% 143.1% 105.0% 194.8%
Industry WACC 83.1% 101.4% 102.3% 115.7% 92.6% 155.4% 142.1% 143.8% 104.8% 202.3%
50/50 debt/equity 80.3% 96.9% 98.0% 114.0% 89.6% 148.1% 135.4% 137.6% 103.8% 195.9%

(a) Present value of positive cash flows divided by present value of negative cash flows.
-18- UVA-F-0814

Exhibit 6

ISKALL ARNO, INC. (Abridged)

Dollar Values of All Expected Project Synergies


on After-Tax Cash Flow
(millions of dollars)
(1) (2) (3) (7) (8) (9) (10) (11)
Truck New Expand Expand Expand New Ad Theme
Fleet Plant Plant East South Product Campaign Park Limit

1. Truck Fleet 0.50 0.25 1.25 1.25 0.50 5.00

2. New Plant 0.50 1.75 1.75 2.00 1.00 5.50a

3. Expand Plant 0.25 0.25 1.50a

4. R&D Project

5. Conveyer

6. Poll. Trap

7. Expand East 1.25 1.75 3.00 1.00

8. Expand South 1.25 1.75 3.00 0.75

9. New Product 2.00 0.25

10. Ad Campaign 0.50 1.00 3.00 3.00

11. Theme Park 1.00 0.75

Capacity Limit 5.00 5.50a 1.50a

Note: Each synergy begins to take effect when both projects allow, and are no longer projected to be in effect at the end of the
shortest projects economic life. Also, because of size constraints, no projects benefits may exceed the stated capacity
limit.

a
Plus depreciation.
-19- UVA-F-0814

Exhibit 7

ISKALL ARNO, INC. (Abridged)

Revised Summary Results of Project Synergies

Expand
Truck New Expand
Projects 1, 2, & 3 Fleet Plant Plant Total
Total investment $22.00 $30.00 $10.00 $62.00
Ave. payback (yrs) 6 6 6 6
Risk-adjusted NPV ($1.79) $1.61 $0.70 $0.52
IRR 9.8% 12.2% 12.3% 11.6%
Profitability index 90.1% 105.4% 107.0%

Expand New
Truck New Expand Product
Projects 1, 2, 3, & 9 Fleet Plant Plant Line Total
Total investment $22.00 $30.00 $10.00 $18.00 $80.00
Ave. payback (yrs) 6 5 6 4 5
Risk-adjusted NPV ($1.79) $6.26 $1.16 $12.91 $18.55
IRR 9.8% 15.5% 13.4% 26.4% 16.9%
Profitability index 90.1% 120.9% 111.6% 171.7%

Expand
Truck New Expand Ad
Projects 1, 2, 3, & 10 Fleet Plant Plant Campaign Total
Total investment $22.00 $30.00 $10.00 $15.00 $77.00
Ave. payback (yrs) 6 6 6 2 5
Risk-adjusted NPV ($1.19) $2.83 $0.70 $2.34 $4.67
IRR 10.7% 13.1% 12.3% 24.7% 13.3%
Profitability index 93.3% 109.4% 107.0% 119.5%

Expand Expand
Truck New Market
Projects 1, 2, & 7 Fleet Plant Eastward Total
Total investment $22.00 $30.00 $20.00 $72.00
Ave. payback (yrs) 5 5 4 5
Risk-adjusted NPV $0.16 $5.58 $17.88 $23.62
IRR 12.8% 15.0% 28.3% 19.0%
Profitability index 100.9% 118.6% 189.4%
-20- UVA-F-0814

Exhibit 7 (continued)

Revised Summary Results of Project Synergies

Expand Expand
Truck New Market
Projects 1, 2, & 8 Fleet Plant Southward Total
Total investment $22.00 $30.00 $20.00 $72.00
Ave. payback (yrs) 5 5 4 5
Risk-adjusted NPV $0.16 $5.58 $15.28 $21.02
IRR 12.8% 15.0% 25.6% 17.1%
Profitability index 100.9% 118.6% 176.4%

Expand New
Truck New Product
Projects 1, 2, & 9 Fleet Plant Line Total
Total investment $22.00 $30.00 $18.00 $70.00
Ave. payback (yrs) 6 5 4 5
Risk-adjusted NPV ($2.23) $6.26 $12.46 $16.48
IRR 9.2% 15.5% 25.8% 17.1%
Profitability index 87.7% 120.9% 169.2%

Expand
Truck New Ad
Projects 1, 2, & 10 Fleet Plant Campaign Total
Total investment $22.00 $30.00 $15.00 $67.00
Ave. payback (yrs) 6 6 3 6
Risk-adjusted NPV ($2.23) $2.83 $1.75 ($2.35)
IRR 9.2% 13.1% 21.9% 12.7%
Profitability index 87.7% 109.4% 114.6%

Expand
New Expand Market Ad
Projects 2, 3, 7, & 10 Plant Plant Eastward Campaign Total
Total investment $30.00 $10.00 $20.00 $15.00 $75.00
Ave. payback (yrs) 5 6 4 2 5
Risk-adjusted NPV $7.25 $0.54 $15.48 $3.22 $26.49
IRR 16.4% 12.0% 25.5% 28.8% 19.9%
Profitability index 124.2% 105.4% 177.4% 126.8%
-21- UVA-F-0814

Exhibit 7 (continued)

Revised Summary Results of Project Synergies

Expand
New Expand Market Ad
Projects 2, 3, 8, & 10 Plant Plant Southward Campaign Total
Total investment $30.00 $10.00 $20.00 $15.00 $75.00
Ave. payback (yrs) 5 6 5 2 5
Risk-adjusted NPV $7.25 $0.54 $12.87 $3.22 $23.87
IRR 16.4% 12.0% 22.9% 28.8% 19.0%
Profitability index 124.2% 105.4% 164.3% 126.8%

Expand New
New Market Product
Projects 2, 7, & 9 Plant Eastward Line Total
Total investment $30.00 $20.00 $18.00 $68.00
Ave. payback (yrs) 5 4 4 5
Risk-adjusted NPV $7.95 $15.42 $10.99 $34.36
IRR 16.9% 25.5% 24.5% 21.6%
Profitability index 126.5% 177.1% 161.1%

Expand
New Market Ad
Projects 2, 7, & 10 Plant Eastward Campaign Total
Total investment $30.00 $20.00 $15.00 $65.00
Ave. payback (yrs) 5 4 2 4
Risk-adjusted NPV $6.03 $19.07 $5.28 $30.37
IRR 15.4% 30.0% 38.2% 23.2%
Profitability index 120.1% 195.4% 144.0%

Expand New
New Market Product
Projects 2, 8, & 9 Plant Southward Line Total
Total investment $30.00 $20.00 $18.00 $68.00
Ave. payback (yrs) 5 5 4 5
Risk-adjusted NPV $7.95 $12.81 $10.99 $31.75
IRR 16.9% 22.9% 24.5% 20.8%
Profitability index 126.5% 164.0% 161.1%
-22- UVA-F-0814

Exhibit 7 (continued)

Revised Summary Results of Project Synergies

Expand
New Market Ad
Projects 2, 8, & 10 Plant Southward Campaign Total
Total investment $30.00 $20.00 $15.00 $65.00
Ave. payback (yrs) 5 4 2 4
Risk-adjusted NPV $6.03 $16.47 $5.28 $27.77
IRR 15.4% 27.3% 38.2% 22.1%
Profitability index 120.1% 182.4% 144.0%

Expand
Market Ad Theme
Projects 7, 10, & 11 Eastward Campaign Park Total
Total investment $20.00 $15.00 $40.00 $75.00
Ave. payback (yrs) 4 2 5 4
Risk-adjusted NPV $16.29 $4.10 $35.47 $55.87
IRR 26.5% 32.9% 29.7% 29.0%
Profitability index 181.5% 134.2% 209.0%

Expand
Market Ad Theme
Projects 8, 10, & 11 Southward Campaign Park Total
Total investment $20.00 $15.00 $40.00 $75.00
Ave. payback (yrs) 5 2 5 5
Risk-adjusted NPV $12.61 $4.10 $34.93 $51.64
IRR 22.8% 32.9% 29.4% 27.7%
Profitability index 163.1% 134.2% 207.3%
-23- UVA-F-0814

Exhibit 8--A

ISKALL ARNO, INC. (Abridged)

Projects 1, 2, & 3

-----------Separate----------- ----------------Combined----------------
Expand Expand
Truck New Expand Truck New Expand
Fleet Plant Plant Fleet Plant Plant Total

Property $20.00 $25.00 $10.00 $20.00 $25.00 $10.00 $55.00


Working Capital 2.00 5.00 2.00 5.00 7.00

62.00
FREE CASH FLOWS Year

0 -11.40 -30.00 -10.00 -11.40 -30.00 -10.00 -51.40


1 -7.90 2.00 1.25 -7.53 2.25 1.38 -3.90
2 3.00 5.00 1.50 3.38 5.25 1.63 10.25
3 3.50 5.50 1.75 3.88 5.75 1.88 11.50
4 4.00 6.00 2.00 4.38 6.25 2.13 12.75
5 4.50 6.25 2.25 4.88 6.50 2.38 13.75
6 5.00 6.50 2.50 5.00 6.75 2.50 14.25
7 7.00 6.75 1.50 7.00 7.00 1.50 15.50
8 5.00 1.50 5.00 1.50 6.50
9 5.25 1.50 5.25 1.50 6.75
10 . 5.50 1.50 . 5.50 1.50 7.00

Free cash flow $7.70 $23.75 $7.25 $9.58 $25.50 $7.88 $42.95

Ave. payback (yrs) 6 6 6 6 6 6 6

Risk-adjusted
discount rate 12.6% 11.0% 10.7% 12.6% 11.0% 10.7%

Net present value at


risk-adjusted rate ($3.12) $0.43 $0.23 ($1.79) $1.61 $0.70 $0.52

Internal rate
of return 7.8% 11.3% 11.2% 9.8% 12.2% 12.3% 11.6%

Profitability index 83.1% 101.4% 102.3% 90.1% 105.4% 107.0%


-24- UVA-F-0814

Exhibit 8--B

ISKALL ARNO, INC. (Abridged)

Projects 1, 2, 3, & 9
-----------------------------------Separate---------------------------------- -----------------------------------Combined----------------------------------
Expand New Expand New
Truck New Expand Product Truck New Expand Product
Fleet Plant Plant Line Fleet Plant Plant Line Total

Property $20.00 $25.00 $10.00 $15.00 $20.00 $25.00 $10.00 $15.00 $70.00
Working Capital 2.00 5.00 3.00 2.00 5.00 3.00 10.00
80.00

FREE CASH FLOW Year

0 -11.40 -30.00 -10.00 -18.00 -11.40 -30.00 -10.00 -18.00 -69.40


1 -7.90 2.00 1.25 3.00 -7.53 3.25 1.50 4.13 1.35
2 3.00 5.00 1.50 4.00 3.38 6.25 1.75 5.13 16.50
3 3.50 5.50 1.75 4.50 3.88 6.75 2.00 5.63 18.25
4 4.00 6.00 2.00 5.00 4.38 7.25 2.25 6.13 20.00
5 4.50 6.25 2.25 5.00 4.88 7.50 2.50 6.13 21.00
6 5.00 6.50 2.50 5.00 5.00 7.50 2.50 5.75 20.75
7 7.00 6.75 1.50 5.00 7.00 7.50 1.50 5.50 21.50
8 5.00 1.50 5.00 5.50 1.50 5.50 12.50
9 5.25 1.50 5.00 5.50 1.50 5.25 12.25
10 . 5.50 1.50 5.00 . 5.50 1.50 5.00 12.00

Free cash flow $7.70 $23.75 $7.25 $28.50 $9.58 $32.50 $8.50 $36.13 $86.70

Ave. payback (yrs) 6 6 6 5 6 5 6 4 5

Risk-adjusted
discount rate 12.6% 11.0% 10.7% 11.5% 12.6% 11.0% 10.7% 11.5%

Net present value at


risk-adjusted rate ($3.12) $0.43 $0.23 $7.88 ($1.79) $6.26 $1.16 $12.91 $18.55

Internal rate
of return 7.8% 11.3% 11.2% 20.5% 9.8% 15.5% 13.4% 26.4% 16.9%

Profitability index 83.1% 101.4% 102.3% 143.8% 90.1% 120.9% 111.6% 171.7%
-25- UVA-F-0814

Exhibit 8--C

ISKALL ARNO, INC. (Abridged)

Projects 1, 2, 3, & 10
------------------------------------Separate--------------------------------- -------------------------------------Combined----------------------------------
Expand Expand
Truck New Expand Ad Truck New Expand Ad
Fleet Plant Plant Campaign Fleet Plant Plant Campaign Total

Property $20.00 $25.00 $10.00 $15.00 $20.00 $25.00 $10.00 $15.00 $70.00
Working Capital 2.00 5.00 2.00 5.00 7.00
77.00

FREE CASH FLOW Year

0 -11.40 -30.00 -10.00 -12.00 -11.40 -30.00 -10.00 -12.00 -63.40


1 -7.90 2.00 1.25 5.50 -7.28 2.75 1.38 6.25 3.10
2 3.00 5.00 1.50 5.50 3.63 5.75 1.63 6.25 17.25
3 3.50 5.50 1.75 5.00 4.13 6.25 1.88 5.75 18.00
4 4.00 6.00 2.00 4.38 6.25 2.13 12.75
5 4.50 6.25 2.25 4.88 6.50 2.38 13.75
6 5.00 6.50 2.50 5.00 6.75 2.50 14.25
7 7.00 6.75 1.50 7.00 7.00 1.50 15.50
8 5.00 1.50 5.00 1.50 6.50
9 5.25 1.50 5.25 1.50 6.75
10 . 5.50 1.50 . . 5.50 1.50 . 7.00

Free cash flow $7.70 $23.75 $7.25 $4.00 $10.33 $27.00 $7.88 $6.25 $51.45

Ave. payback (yrs) 6 6 6 3 6 6 6 2 5

Risk-adjusted
discount rate 12.6% 11.0% 10.7% 13.3% 12.6% 11.0% 10.7% 13.3%

Net present value at


risk-adjusted rate ($3.12) $0.43 $0.23 $0.58 ($1.19) $2.83 $0.70 $2.34 $4.67

Internal rate
of return 7.8% 11.3% 11.2% 16.2% 10.7% 13.1% 12.3% 24.7% 13.3%

Profitability index 83.1% 101.4% 102.3% 104.8% 93.3% 109.4% 107.0% 119.5%
-26- UVA-F-0814

Exhibit 8--D

ISKALL ARNO, INC. (Abridged)

Projects 1, 2, & 7
-------------Separate-------------- -------------Combined-------------
Expand Expand Expand Expand
Truck New Market Truck New Market
Fleet Plant Eastward Fleet Plant Eastward Total

Property $20.00 $25.00 $20.00 $25.00 $45.00


Working Capital 2.00 5.00 20.00 2.00 5.00 20.00 27.00
72.00
FREE CASH FLOWS Year

0 -11.40 -30.00 -20.00 -11.40 -30.00 -20.00 -61.40


1 -7.90 2.00 3.50 -6.90 3.13 5.13 1.35
2 3.00 5.00 4.00 4.00 6.13 5.63 15.75
3 3.50 5.50 4.50 4.50 6.63 6.13 17.25
4 4.00 6.00 5.00 5.00 7.13 6.63 18.75
5 4.50 6.25 5.50 5.00 7.13 6.63 18.75
6 5.00 6.50 6.00 5.00 7.38 6.88 19.25
7 7.00 6.75 6.50 7.00 7.50 7.25 21.75
8 5.00 7.00 5.50 7.50 13.00
9 5.25 7.50 5.50 7.75 13.25
10 . 5.50 8.00 . 5.50 8.00 13.50

Free cash flow $7.70 $23.75 $37.50 $12.20 $31.50 $47.50 $91.20

Ave. payback (yrs) 6 6 5 5 5 4 5

Risk-adjusted
discount rate 12.6% 11.0% 11.2% 12.6% 11.0% 11.2%

Net present value at


risk-adjusted rate ($3.12) $0.43 $11.07 $0.16 $5.58 $17.88 $23.62

Internal rate
of return 7.8% 11.3% 21.4% 12.8% 15.0% 28.3% 19.0%

Profitability index 83.1% 101.4% 155.4% 100.9% 118.6% 189.4%


-27- UVA-F-0814

Exhibit 8--E

ISKALL ARNO, INC. (Abridged)

Projects 1, 2, & 8
-------------Separate------------- -------------Combined------------
Expand Expand Expand Expand
Truck New Market Truck New Market
Fleet Plant Eastward Fleet Plant Eastward Total

Property $20.00 $25.00 $20.00 $25.00 $45.00


Working Capital 2.00 5.00 20.00 2.00 5.00 20.00 27.00
72.00

FREE CASH FLOWS Year

0 -11.40 -30.00 -20.00 -11.40 -30.00 -20.00 -61.40


1 -7.90 2.00 3.00 -6.90 3.13 4.63 0.85
2 3.00 5.00 3.50 4.00 6.13 5.13 15.25
3 3.50 5.50 4.00 4.50 6.63 5.63 16.75
4 4.00 6.00 4.50 5.00 7.13 6.13 18.25
5 4.50 6.25 5.00 5.00 7.13 6.13 18.25
6 5.00 6.50 5.50 5.00 7.38 6.38 18.75
7 7.00 6.75 6.00 7.00 7.50 6.75 21.25
8 5.00 6.50 5.50 7.00 12.50
9 5.25 7.00 5.50 7.25 12.75
10 . 5.50 7.50 . 5.50 7.50 13.00

Free cash flow $7.70 $23.75 $32.50 $12.20 $31.50 $42.50 $86.20

Ave. payback (yrs) 6 6 6 5 5 4 5

Risk-adjusted
discount rate 12.6% 11.0% 11.0% 12.6% 11.0% 11.0%

Net present value at


risk-adjusted rate ($3.12) $0.43 $8.43 $0.16 $5.58 $15.28 $21.02

Internal rate
of return 7.8% 11.3% 18.8% 12.8% 15.0% 25.6% 18.1%

Profitability index 83.1% 101.4% 142.1% 100.9% 118.6% 176.4%


-28- UVA-F-0814

Exhibit 8--F

ISKALL ARNO, INC. (Abridged)

Projects 1, 2, & 9
--------------Separate-------------- -------------Combined------------
Expand New Expand New
Truck New Product Truck New Product
Fleet Plant Line Fleet Plant Line Total

Property $20.00 $25.00 $15.00 $20.00 $25.00 $15.00 $60.00


Working Capital 2.00 5.00 3.00 2.00 5.00 3.00 10.00
70.00

FREE CASH FLOWS Year

0 -11.40 -30.00 -18.00 -11.40 -30.00 -18.00 -59.40


1 -7.90 2.00 3.00 -7.65 3.25 4.00 -0.40
2 3.00 5.00 4.00 3.25 6.25 5.00 14.50
3 3.50 5.50 4.50 3.75 6.75 5.50 16.00
4 4.00 6.00 5.00 4.25 7.25 6.00 17.50
5 4.50 6.25 5.00 4.75 7.50 6.00 18.25
6 5.00 6.50 5.00 5.00 7.50 5.75 18.25
7 7.00 6.75 5.00 7.00 7.50 5.50 20.00
8 5.00 5.00 5.50 5.50 11.00
9 5.25 5.00 5.50 5.25 10.75
10 . 5.50 5.00 . 5.50 5.00 10.50

Free cash flow $7.70 $23.75 $28.50 $8.95 $32.50 $35.50 $76.95

Ave. payback (yrs) 6 6 5 6 5 4 5

Risk-adjusted
discount rate 12.6% 11.0% 11.5% 12.6% 11.0% 11.5%

Net present value at


risk-adjusted rate ($3.12) $0.43 $7.88 ($2.23) $6.26 $12.46 $16.48

Internal rate
of return 7.8% 11.3% 20.5% 9.2% 15.5% 25.8% 17.1%

Profitability index 83.1% 101.4% 143.8% 87.7% 120.9% 169.2%


-29- UVA-F-0814

Exhibit 8--G

ISKALL ARNO, INC. (Abridged)

Projects 1, 2, & 10

--------------Separate---------------- --------------Combined-------------
Expand Expand
Truck New Ad Truck New Ad
Fleet Plant Campaign Fleet Plant Campaign Total

Property $20.00 $25.00 $15.00 $20.00 $25.00 $15.00 $60.00


Working Capital 2.00 5.00 2.00 5.00 7.00
67.00

FREE CASH FLOWS Year

0 -11.40 -30.00 -12.00 -11.40 -30.00 -12.00 -53.40


1 -7.90 2.00 5.50 -7.65 2.75 6.00 1.10
2 3.00 5.00 5.50 3.25 5.75 6.00 15.00
3 3.50 5.50 5.00 3.75 6.25 5.50 15.50
4 4.00 6.00 4.25 6.25 10.50
5 4.50 6.25 4.75 6.50 11.25
6 5.00 6.50 5.00 6.75 11.75
7 7.00 6.75 7.00 7.00 14.00
8 5.00 5.00 5.00
9 5.25 5.25 5.25
10 . 5.50 . . 5.50 . 5.50

Free cash flow $7.70 $23.75 $4.00 $8.95 $27.00 $5.50 $41.45

Ave. payback (yrs) 6 6 3 6 6 3 6

Risk-adjusted
discount rate 12.6% 11.0% 13.3% 12.6% 11.0% 13.3%

Net present value at


risk-adjusted rate ($3.12) $0.43 $0.58 ($2.23) $2.83 $1.75 ($2.35)

Internal rate
of return 7.8% 11.3% 16.2% 9.2% 13.1% 21.9% 12.7%

Profitability index 83.1% 101.4% 104.8% 87.7% 109.4% 114.6%


-30- UVA-F-0814

Exhibit 8--H

ISKALL ARNO, INC. (Abridged)

Projects 2, 3, 7, & 10
----------Separate---------- -----------Combined---------
Expand Expand
New Expand Market Ad New Expand Market Ad
Plant Plant Eastward Campaign Plant Plant Eastward Campaign Total

Property $25.00 $10.00 $15.00 $25.00 $10.00 $15.00 $50.00


Working Capital 5.00 20.00 5.00 20.00 25.00
75.00

FREE CASH FLOWS Year

0 -30.00 -10.00 -20.00 -12.00 -30.00 -10.00 -20.00 -12.00 -72.00


1 2.00 1.25 3.50 5.50 3.88 1.38 4.38 6.63 16.25
2 5.00 1.50 4.00 5.50 6.88 1.63 4.88 6.63 20.00
3 5.50 1.75 4.50 5.00 7.38 1.88 5.38 6.13 20.75
4 6.00 2.00 5.00 6.88 2.00 5.88 14.75
5 6.25 2.25 5.50 7.13 2.25 6.38 15.75
6 6.50 2.50 6.00 7.38 2.50 6.88 16.75
7 6.75 1.50 6.50 7.50 1.50 7.38 16.38
8 5.00 1.50 7.00 5.50 1.50 7.50 14.50
9 5.25 1.50 7.50 5.50 1.50 7.75 14.75
10 5.50 1.50 8.00 . 5.50 1.50 8.00 . 15.00

Free cash flow $23.75 $7.25 $37.50 $4.00 $33.50 $7.63 $44.38 $7.38 $92.88

Ave. payback (yrs) 6 6 5 3 5 6 4 2 5

Risk-adjusted
discount rate 11.0% 10.7% 11.2% 13.3% 11.0% 10.7% 11.2% 13.3%

Net present value at


risk-adjusted rate $0.43 $0.23 $11.07 $0.58 $7.25 $0.54 $15.48 $3.22 $26.49

Internal rate
of return 11.3% 11.2% 21.4% 16.2% 16.4% 12.0% 25.5% 28.8% 19.9%

Profitability index 101.4% 102.3% 155.4% 104.8% 124.2% 105.4% 177.4% 126.8%
-31- UVA-F-0814

Exhibit 8--I

ISKALL ARNO, INC. (Abridged)

Projects 2, 3, 8, & 10
----------Separate---------- -----------Combined------------
Expand Expand
New Expand Market Ad New Expand Market Ad
Plant Plant Southward Campaign Plant Plant Southward Campaign Total

Property $25.00 $10.00 $15.00 $25.00 $10.00 $15.00 $50.00


Working Capital 5.00 20.00 5.00 20.00 25.00
75.00

FREE CASH FLOWS Year

0 -30.00 -10.00 -20.00 -12.00 -30.00 -10.00 -20.00 -12.00 -72.00


1 2.00 1.25 3.00 5.50 3.88 1.38 3.88 6.63 15.75
2 5.00 1.50 3.50 5.50 6.88 1.63 4.38 6.63 19.50
3 5.50 1.75 4.00 5.00 7.38 1.88 4.88 6.13 20.25
4 6.00 2.00 4.50 6.88 2.00 5.38 14.25
5 6.25 2.25 5.00 7.13 2.25 5.88 15.25
6 6.50 2.50 5.50 7.38 2.50 6.38 16.25
7 6.75 1.50 6.00 7.50 1.50 6.88 15.88
8 5.00 1.50 6.50 5.50 1.50 7.00 14.00
9 5.25 1.50 7.00 5.50 1.50 7.25 14.25
10 5.50 1.50 7.50 . 5.50 1.50 7.50 . 14.50

Free cash flow $23.75 $7.25 $32.50 $4.00 $33.50 $7.63 $39.38 $7.38 $87.88

Ave. payback (yrs) 6 6 6 3 5 6 5 2 5

Risk-adjusted
discount rate 11.0% 10.7% 11.0% 13.3% 11.0% 10.7% 11.0% 13.3%

Net present value at


risk-adjusted rate $0.43 $0.23 $8.43 $0.58 $7.25 $0.54 $12.87 $3.22 $23.87

Internal rate
of return 11.3% 11.2% 18.8% 16.2% 16.4% 12.0% 22.9% 28.8% 19.0%

Profitability index 101.4% 102.3% 142.1% 104.8% 124.2% 105.4% 164.3% 126.8%
-32- UVA-F-0814

Exhibit 8--J

ISKALL ARNO, INC. (Abridged)

Projects 2, 7, & 9

--------------Separate--------------- -------------Combined-------------
Expand New Expand New
New Market Product New Market Product
Plant Eastward Line Plant Eastward Line Total

Property $25.00 $15.00 $25.00 $15.00 $40.00


Working Capital 5.00 20.00 3.00 5.00 20.00 3.00 28.00
68.00

FREE CASH FLOWS Year

0 -30.00 -20.00 -18.00 -30.00 -20.00 -18.00 -68.00


1 2.00 3.50 3.00 3.88 4.38 4.00 12.25
2 5.00 4.00 4.00 6.88 4.88 5.00 16.75
3 5.50 4.50 4.50 7.38 5.38 5.50 18.25
4 6.00 5.00 5.00 7.50 5.88 5.63 19.00
5 6.25 5.50 5.00 7.50 6.38 5.38 19.25
6 6.50 6.00 5.00 7.50 6.88 5.13 19.50
7 6.75 6.50 5.00 7.50 7.25 5.00 19.75
8 5.00 7.00 5.00 5.50 7.50 5.00 18.00
9 5.25 7.50 5.00 5.50 7.75 5.00 18.25
10 5.50 8.00 5.00 5.50 8.00 5.00 18.50

Free cash flow $23.75 $37.50 $28.50 $34.63 $44.25 $32.63 $111.50

Ave. payback (yrs) 6 5 5 5 4 4 5

Risk-adjusted
discount rate 11.0% 11.2% 11.5% 11.0% 11.2% 11.5%

Net present value at


risk-adjusted rate $0.43 $11.07 $7.88 $7.95 $15.42 $10.99 $34.36

Internal rate
of return 11.3% 21.4% 20.5% 16.9% 25.5% 24.5% 21.6%

Profitability index 101.4% 155.4% 143.8% 126.5% 177.1% 161.1%


-33- UVA-F-0814

Exhibit 8--K

ISKALL ARNO, INC. (Abridged)

Projects 2, 7, & 10

-------------Separate---------------- --------------Combined------------
Expand Expand
New Market Ad New Market Ad
Plant Eastward Campaign Plant Eastward Campaign Total

Property $25.00 $15.00 $25.00 $15.00 $40.00


Working Capital 5.00 20.00 5.00 20.00 25.00
65.00

FREE CASH FLOWS Year

0 -30.00 -20.00 -12.00 -30.00 -20.00 -12.00 -62.00


1 2.00 3.50 5.50 3.38 5.88 7.50 16.75
2 5.00 4.00 5.50 6.38 6.38 7.50 20.25
3 5.50 4.50 5.00 6.88 6.88 7.00 20.75
4 6.00 5.00 6.88 5.88 12.75
5 6.25 5.50 7.13 6.38 13.50
6 6.50 6.00 7.38 6.88 14.25
7 6.75 6.50 7.50 7.25 14.75
8 5.00 7.00 5.50 7.50 13.00
9 5.25 7.50 5.50 7.75 13.25
10 5.50 8.00 . 5.50 8.00 . 13.50

Free cash flow $23.75 $37.50 $4.00 $32.00 $48.75 $10.00 $90.75

Ave. payback (yrs) 6 5 3 5 4 2 4

Risk-adjusted
discount rate 11.0% 11.2% 13.3% 11.0% 11.2% 13.3%

Net present value at


risk-adjusted rate $0.43 $11.07 $0.58 $6.03 $19.07 $5.28 $30.37

Internal rate
of return 11.3% 21.4% 16.2% 15.4% 30.0% 38.2% 23.2%

Profitability index 101.4% 155.4% 104.8% 120.1% 195.4% 144.0%


-34- UVA-F-0814

Exhibit 8--L

ISKALL ARNO, INC. (Abridged)


Projects 2, 8, & 9

---------------Separate-------------- --------------Combined--------------
Expand New Expand New
New Market Product New Market Product
Plant Southward Line Plant Southward Line Total

Property $25.00 $15.00 $25.00 $15.00 $40.00


Working Capital 5.00 20.00 3.00 5.00 20.00 3.00 28.00
68.00

FREE CASH FLOWS Year

0 -30.00 -20.00 -18.00 -30.00 -20.00 -18.00 -68.00


1 2.00 3.00 3.00 3.88 3.88 4.00 11.75
2 5.00 3.50 4.00 6.88 4.38 5.00 16.25
3 5.50 4.00 4.50 7.38 4.88 5.50 17.75
4 6.00 4.50 5.00 7.50 5.38 5.63 18.50
5 6.25 5.00 5.00 7.50 5.88 5.38 18.75
6 6.50 5.50 5.00 7.50 6.38 5.13 19.00
7 6.75 6.00 5.00 7.50 6.75 5.00 19.25
8 5.00 6.50 5.00 5.50 7.00 5.00 17.50
9 5.25 7.00 5.00 5.50 7.25 5.00 17.75
10 5.50 7.50 5.00 5.50 7.50 5.00 18.00

Free cash flow $23.75 $32.50 $28.50 $34.63 $39.25 $32.63 $106.50

Ave. payback (yrs) 6 6 5 5 5 4 5

Risk-adjusted
discount rate 11.0% 11.0% 11.5% 11.0% 11.0% 11.5%

Net present value at


risk-adjusted rate $0.43 $8.43 $7.88 $7.95 $12.81 $10.99 $31.75

Internal rate
of return 11.3% 18.8% 20.5% 16.9% 22.9% 24.5% 20.8%

Profitability index 101.4% 142.1% 143.8% 126.5% 164.0% 161.1%


-35- UVA-F-0814

Exhibit 8--M

ISKALL ARNO, INC. (Abridged)

Projects 2, 8, & 10

------------------Separate----------------- ----------------Combined----------------
Expand Expand
New Market Ad New Market Ad
Plant Southward Campaign Plant Southward Campaign Total

Property $25.00 $15.00 $25.00 $15.00 $40.00


Working Capital 5.00 20.00 5.00 20.00 25.00
65.00

FREE CASH FLOWS Year

0 -30.00 -20.00 -12.00 -30.00 -20.00 -12.00 -62.00


1 2.00 3.00 5.50 3.38 5.38 7.50 16.25
2 5.00 3.50 5.50 6.38 5.88 7.50 19.75
3 5.50 4.00 5.00 6.88 6.38 7.00 20.25
4 6.00 4.50 6.88 5.38 12.25
5 6.25 5.00 7.13 5.88 13.00
6 6.50 5.50 7.38 6.38 13.75
7 6.75 6.00 7.50 6.75 14.25
8 5.00 6.50 5.50 7.00 12.50
9 5.25 7.00 5.50 7.25 12.75
10 5.50 7.50 . 5.50 7.50 . 13.00

Free cash flow $23.75 $32.50 $4.00 $32.00 $43.75 $10.00 $85.75

Ave. payback (yrs) 6 6 3 5 4 2 4

Risk-adjusted
discount rate 11.0% 11.0% 13.3% 11.0% 11.0% 13.3%

Net present value at


risk-adjusted rate $0.43 $8.43 $0.58 $6.03 $16.47 $5.28 $27.77

Internal rate
of return 11.3% 18.8% 16.2% 15.4% 27.3% 38.2% 22.1%

Profitability index 101.4% 142.1% 104.8% 120.1% 182.4% 144.0%


-36- UVA-F-0814

Exhibit 8--N

ISKALL ARNO, INC. (Abridged)

Projects 7, 10, & 11

-----------------Separate----------------- ----------------Combined---------------
Expand Expand
Market Ad Theme Market Ad Theme
Eastward Campaign Park Eastward Campaign Park Total

Property $15.00 $30.00 $15.00 $30.00 $45.00


Working Capital 20.00 10.00 20.00 10.00 30.00
75.00

FREE CASH FLOWS Year

0 -20.00 -12.00 -15.00 -20.00 -12.00 -15.00 -47.00


1 3.50 5.50 -20.00 4.00 7.00 -20.00 -9.00
2 4.00 5.50 5.00 6.00 7.00 5.50 18.50
3 4.50 5.00 9.00 6.50 6.50 9.50 22.50
4 5.00 11.00 5.50 11.50 17.00
5 5.50 13.00 6.00 13.50 19.50
6 6.00 15.00 6.50 15.50 22.00
7 6.50 17.00 7.00 17.50 24.50
8 7.00 19.00 7.50 19.50 27.00
9 7.50 21.00 8.00 21.50 29.50
10 8.00 . 59.00 8.50 . 59.50 68.00

Free cash flow $37.50 $4.00 $134.00 $45.50 $8.50 $138.50 $192.50

Ave. payback (yrs) 5 3 5 4 2 5 4

Risk-adjusted
discount rate 11.2% 13.3% 14.0% 11.2% 13.3% 14.0%

Net present value at


risk-adjusted rate $11.07 $0.58 $33.30 $16.29 $4.10 $35.47 $55.87

Internal rate
of return 21.4% 16.2% 28.7% 26.5% 32.9% 29.7% 29.0%

Profitability index 155.4% 104.8% 202.3% 181.5% 134.2% 209.0%


-37- UVA-F-0814

Exhibit 8--O

ISKALL ARNO, INC. (Abridged)

Projects 8, 10, & 11

------------------Separate----------------- ----------------Combined--------------
Expand Expand
Market Ad Theme Market Ad Theme
Southward Campaign Park Southward Campaign Park Total

Property $15.00 $30.00 $15.00 $30.00 $45.00


Working Capital 20.00 10.00 20.00 10.00 30.00
75.00

FREE CASH FLOWS Year

0 -20.00 -12.00 -15.00 -20.00 -12.00 -15.00 -47.00


1 3.00 5.50 -20.00 3.00 7.00 -20.00 -10.00
2 3.50 5.50 5.00 5.38 7.00 5.38 17.75
3 4.00 5.00 7.00 5.88 6.50 9.38 21.75
4 4.50 10.00 4.88 11.38 16.25
5 5.00 17.00 5.38 13.38 18.75
6 5.50 20.00 5.88 15.38 21.25
7 6.00 22.00 6.38 17.38 23.75
8 6.50 24.00 6.88 19.38 26.25
9 7.00 26.00 7.38 21.38 28.75
10 7.50 . 28.00 7.88 . 59.38 67.25

Free cash flow $32.50 $4.00 $124.00 $38.88 $8.50 $137.38 $184.75

Ave. payback (yrs) 6 3 5 5 2 5 5

Risk-adjusted
discount rate 11.0% 13.3% 14.0% 11.0% 13.3% 14.0%

Net present value at


risk-adjusted rate $8.43 $0.58 $32.64 $12.61 $4.10 $34.93 $51.64

Internal rate
of return 18.8% 16.2% 29.1% 22.8% 32.9% 29.4% 27.7%

Profitability index 142.1% 104.8% 200.3% 163.1% 134.2% 207.3%