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Case Report: Victoria Chemicals Plc (a): the Merseyside Project

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Case Report 5: Victoria Chemicals PLC (A): The Merseyside Project
Introduction
Victoria Chemicals is the primary competitor of production of polypropylene in chemicals industry. Due to the old production process, Victoria Chemicals becomes less competitive and its earnings decline from 250 pence in 2006 to 180 pence in 2007. The company is supposed to improve its finical performance to gain investors.
There is a Merseyside project consisted of GBP12million expenditure can improve the production efficiency and achieve the energy savings.
This report investigates the analysis of the Merseyside project and figure out the issues of the project through the calculation of new NPV and IRR. In addition, the report provides the recommendation of whether to accept the project.
Issue 1: Shut down period
For such a large size of the project taking GBP12million expenditure, the shut down period of 45 days is too short for the company. Therefore, we adjusted the period to 90 days to complete.
Issue 2: Depreciation method
Original model used accelerated basis method to depreciate the assets increase the tax shield in the earlier years of the project. The depreciation method is supposed to be straight-line depreciation.
Issue 3: Treatment of engineering costs
The preliminary engineering cost of 0.5 million spending on the efficiency and design studies of the renovation should considered as a sunk cost. Therefore, the preliminary engineering cost is not supposed to be included in the analysis.
Issue 4: Accelerate rolling stock
If company implements the project, there will be a estimated expense GBP2million on 2010, moving the cash outlay from 2012 to 2010. Because of the time value of the money, the company will lose the interest of GBP2million they should have earned.
Issue 5: Sales cannibalization
If the Merseyside project implemented, the reallocation of the

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