Worked example
Worked example: Should we acquire, build, or partner?
A company must choose how to enter the AI analytics market. Three routes are on the table: acquire a target, build organically, or partner. Here is the complete analysis the Strategic Decision Analyzer produces — every figure below comes from the tool's own calculations.
The decision
"Should we acquire TechCorp for $500M or invest in organic R&D expansion? We need to decide within Q2 to capitalise on the emerging AI market opportunity."
Each option has an upfront cost and a three-point forecast — best case, most likely case and worst case — for the annual cash flow it will generate once running, each with a probability. The three probabilities must sum to 100%.
The inputs
Acquire TechCorp
- Cost
- $500M
- Probabilities
- 30% / 45% / 25%
- Annual cash flow
- $120M / $80M / $20M
Organic R&D investment
- Cost
- $200M
- Probabilities
- 25% / 50% / 25%
- Annual cash flow
- $100M / $60M / $15M
Strategic partnership
- Cost
- $50M
- Probabilities
- 35% / 40% / 25%
- Annual cash flow
- $70M / $45M / $10M
| Option | Cost | Probabilities (best/likely/worst) | Annual cash flow ($M) |
|---|---|---|---|
| Acquire TechCorp | $500M | 30% / 45% / 25% | $120M / $80M / $20M |
| Organic R&D investment | $200M | 25% / 50% / 25% | $100M / $60M / $15M |
| Strategic partnership | $50M | 35% / 40% / 25% | $70M / $45M / $10M |
Assumptions the tool applies: the default 10% annual discount rate (adjustable in the tool), a 10-year horizon, growth faded from each option's entered rate down to a 2% long-run rate, and a terminal value at the end of the horizon.
The results
Acquire TechCorp
- Expected cash flow
- $77.0M/yr
- NPV
- $460M
- Risk score
- 6.7 (high)
- Risk-adjusted NPV
- $199M
- ROI
- 92%
- Payback
- 6.5 years
Organic R&D investment
- Expected cash flow
- $58.8M/yr
- NPV
- $528M
- Risk score
- 5.0 (medium)
- Risk-adjusted NPV
- $317M
- ROI
- 264%
- Payback
- 3.4 years
Strategic partnership
- Expected cash flow
- $45.0M/yr
- NPV
- $537M
- Risk score
- 5.0 (medium)
- Risk-adjusted NPV
- $322M
- ROI
- 1,074%
- Payback
- 13 months
| Option | Expected cash flow | NPV | Risk score | Risk-adjusted NPV | ROI | Payback |
|---|---|---|---|---|---|---|
| Acquire TechCorp | $77.0M/yr | $460M | 6.7 (high) | $199M | 92% | 6.5 years |
| Organic R&D investment | $58.8M/yr | $528M | 5.0 (medium) | $317M | 264% | 3.4 years |
| Strategic partnership | $45.0M/yr | $537M | 5.0 (medium) | $322M | 1,074% | 13 months |
The recommendation
The strategic partnership ranks first on risk-adjusted value at $322M, narrowly ahead of organic R&D at $317M. The acquisition creates real value — $199M risk- adjusted — but its high integration and financial risk strip 57% off its modelled $460M NPV, and it ties up $500M of capital with a 6.5-year payback.
Two lessons worth carrying into your own decisions:
- The partnership's 1,074% ROI is eye-catching, but ROI is not why it wins — it wins on absolute risk-adjusted dollars. If the two smaller options swapped percentages, the ranking on value would still be decided by dollars, not percentages.
- $322M against $317M is a five-million-dollar margin on a five-hundred-million-dollar decision. That is a genuine tie: shift any probability a little and the leader flips. The honest read is "R&D and partnership are effectively level; acquisition is clearly third" — worth more evidence on the two leaders, not a coin flip.
Questions people ask
Should we acquire a company or build the capability ourselves?
Compare every route on the same basis: the cost, the probability-weighted annual cash flow, and the NPV of that cash flow over a fixed horizon, then apply a risk haircut. In the worked example below, the $500M acquisition produces the largest expected cash flow but the lowest risk-adjusted value, because high integration risk removes 57% of its modelled value.
Why is the highest-ROI option not always the right one?
Percentage ROI ignores scale and risk. A $50M partnership earning 1,074% ROI also happens to win on risk-adjusted value here — but if it earned a great percentage on a tiny base while a large programme created far more absolute value, the large programme should still win. Rank on risk-adjusted dollars, then sanity-check percentages.
This example is illustrative and provides decision support, not professional advice. The figures are sample inputs; your own numbers will produce your own ranking. See the Terms & Conditions.