...Assignment 6 Merseyside 1a. We recommend that Frank Greystock make the following changes his discounted cash flow analysis: -Increase inflation to 3% -Remove the sunk preliminary engineering cost of 500,000 dollars. -For the companies consideration we have also calculated the cannibalization rate of Rotterdam sales. 1b. Memo to the Transport Division: From:Ms. Morris To: Transport Division Subject: Greystocks preliminary DCF I recommend that the rolling stock purchases not be included in the Merseyside discounted cash flow analysis. These purchases are not direct costs associated with the project. Since executive VP of each division receive an annual bonus based on the performance of their division. An agency problem would come about since the Transport Division would have no initial costs associated with the Merseyside project, yet would receive all the benefits resulting from its implementation. 2b. Memo to the Director of Sales From:Ms. Morris To: Director of Sales Subject: Greystocks preliminary DCF 3b. Memo to the Griffin Tewitt From:Ms. Morris To:Griffin Tewitt Subject: Greystocks preliminary DCF I do not recommend that the costs linked to the EPC project be included in the Merseyside discounted cash flow analysis. Since the EPC project has an already determined negative net present value, I do not think that its inclusion in the Merseyside project will maximize shareholder value. 4b. From:Ms. Morris To: Andrew Gowan ...
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...Victoria Chemicals: The Merseyside Project Executive Summary Victoria Chemicals is facing pressures from investors to improve its financial performances. The plant manager is currently considering whether to accept a GBP 12million initial outlay project to renovate its polypropylene production line at Merseyside plant. The benefit of the plant is the lower energy requirement of production and a greater manufacturing capacity. This report consist a recommendation for the plant manager which consists an analysis on expectations from different managers of the firms and the impacts of their expectations on the Merseyside project DCF analysis. The results of the analysis and modifications are a positive NPV of GBP 13.5 million and an IRR of 25.97%. The Merseyside project should be accepted as long as the cost of capital is lower than 25.97%. Appendix 1 shows the detailed working of the analysis. Firm Evaluation on Capital-Expenditure Proposals Victoria Chemicals evaluate capital-expenditure proposals by looking at the project’s (1) impact on earnings per share, (2) its payback period, (3) net present value of free cash flow and (4) internal rate of return. The firm uses such a complicated scheme to evaluate capital-expenditure proposals because: (1) Impact on earnings per share evaluates how the project is going to affect shareholders’ wealth of the company. (2) Payback period evaluates how long the project is going to take to reach break-even point. (3) NPV of free...
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...Walmart around the World 1. Evaluate Walmart’s globalization strategy over the last two decades. Where did the retailer struggle? Where did it do well? Can location characteristics explain the differences in Walmart performance 2. Walmart entered in some countries through acquisitions and in some countries through greenfield investment. What entry mode do you think was best? Did location characteristics drive the mode of entry? Why? 3. In 2013, Walmart decided to enter the Indian market in a joint-venture with Bharti Enterprises. Based on your analysis of Walmart’s global expansion up to that point, do you think it was a good idea to go to India? To select joint-venture as the mode of entry? 4. In general, what do you think is the best way to enter a new market: acquisition, joint venture, or greenfield investment? What are the location characteristics that affect this decision? What are the firm characteristics that affect this decision? What industry characteristics affect this decision? Zara – Fast Fashion Please assume you are a competent consultant of a very famous consulting company, such as Boston Consulting Company (BCG), McKenzie, or Monitor. And you are assigned to diagnose/evaluate the current strategy and to give recommendation(s) for the future growth of ZARA (or Inditex). You should submit your report to your boss on the day of the discussion. 1. Describe the characteristics of the industry in which ZARA compete. 2. What are the...
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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...
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...Victoria Chemicals: The Merseyside Project Executive Summary Victoria Chemicals is facing pressures from investors to improve its financial performances. The plant manager is currently considering whether to accept a GBP 12million initial outlay project to renovate its polypropylene production line at Merseyside plant. The benefit of the plant is the lower energy requirement of production and a greater manufacturing capacity. This report consist a recommendation for the plant manager which consists an analysis on expectations from different managers of the firms and the impacts of their expectations on the Merseyside project DCF analysis. The results of the analysis and modifications are a positive NPV of GBP 13.5 million and an IRR of 25.97%. The Merseyside project should be accepted as long as the cost of capital is lower than 25.97%. Appendix 1 shows the detailed working of the analysis. Firm Evaluation on Capital-Expenditure Proposals Victoria Chemicals evaluate capital-expenditure proposals by looking at the project’s (1) impact on earnings per share, (2) its payback period, (3) net present value of free cash flow and (4) internal rate of return. The firm uses such a complicated scheme to evaluate capital-expenditure proposals because: (1) Impact on earnings per share evaluates how the project is going to affect shareholders’ wealth of the company. (2) Payback period evaluates how long the project is going to take to reach break-even point. (3) NPV of free...
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...Empirical Chemicals, LTD (A): The Merseyside Project Spencer Ely FIN 4422 M/W 8am October 24, 2011 Empirical Chemicals is a worldwide competitor in its industry, but earnings are falling and investors are anxious for improved financial performance. The plant manager of an aging production facility believes it’s the right time for plant modernization in order to make up for deferred maintenance in the past and to increase production efficiency. The Merseyside factory belongs to the Intermediate Chemicals Group and produces polypropylene from propylene, which they receive from four major refineries in England made from crude petroleum. The Merseyside factory has one of the biggest plants and output of polypropylene in the industry, but because the plant was constructed in 1967 the production process is old and operates semi continuously and has higher labor content than its competitors. The plant manager Frances Trelawney and Merseyside’s controller Jim Hawkins has proposed a project that will require a large capital expenditure of $7 million that she believes will help improve the process of production of polypropylene. The project consists of relocating and modernizing tank car unloading areas, refurbishing the polymerization tank to achieve higher pressures and thus greater throughput, and renovating the compounding plant to increase extrusion throughput and obtain energy savings. The project has capital budgeting issues with the focus mainly on the relevant cash...
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...MERSETSIDE PROJECT NAME OF PROFESSOR: DR. LIZA MARWATI BINTI MOHD YUSOFF GROUP MEMBERS: LOH CHAI LING A140178 GOH HOOI SAN A139708 KERK (KEH) YIH JEN A139574 SEMESTER 2, 2013/2014 INTRODUCTION Victoria Chemicals, a major competitor in the worldwide chemicals industry, was a leading producer of polypropylene, a polymer which was known for its strength and malleability. Polypropylene is used in an extremely wide variety of products from medical products to packaging film, carpet fibres, and automobile components. It was essentially priced as a commodity. Victoria Chemicals produced polypropylene at two plants which are Merseyside Works and in Rotterdam, Holland. The two plants were identical in scale, age, and design. The managers of both plants reported to James Fawn, executive vice president and manager of the Intermediate Chemicals Group (ICG) of Victoria Chemicals. The company positioned itself as a supplier to customers in Europe and the Middle East. However, their earning per share had fallen from 250 pence per share to 180 pence per share from end of year 2006 to year 2007. And also the accumulation of the firm’ common shares by a well-known corporate raider, Sir David Benjamin had caused the Victoria Chemicals was under pressure from investors to improve its financial performance. Due to this issue, Morris, the plant manager of Victoria Chemicals’ Merseyside Works in Liverpool and her controller, Frank Greystock had proposed a capital project of GBP12...
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...| | | | | | | | | | | | |Group Assignment Paper | |Case Study : Diamond Chemicals plc | | | |Pengajar: ...
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...Victoria chemicals PLC (A): the Merseyside Project As a world wide major competitor in the chemical industry, Victoria Chemicals is a leading producer of polypropylene, a polymer that is used in a variety of products around the globe. Polypropylene is known for its strength and malleability and was priced as a commodity. The company operates two plants that produce polypropylene, one at Merseyside, England and the other at Rotterdam, Holland. Both plants were identical in scale, design, and age. However, Morris Greystock, the manager for the Merseyside plant saw a decline in the company’s stock, and decided to improve the position of the company. To do that, she came up with a project to increase production efficiency, rationalize the Polypropylene production line and renovate the Merseyside plant since the Merseyside production process was old and therefore higher in labor than competitors. The project Greystock wanted to propose to senior management consisted of GBP 12 million expenditure. Grestock was faced with some issues and decisions related to the project that she had to address. Those issues includes, issues with the transport division, the ICG and marketing department, the assistant plant manager, the treasury staff, and evaluating the capital expenditure. Issues: Concerns of the Transport division: Greystock’s argument is that the purchase of tank cars shouldn’t be included in the initial outlay because the company will use the transport division’s excess capacity...
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...Introduction The following report shows that the proposal of the modernisation project should obtain funding from the corporate headquarters of Victoria Chemicals. The project has an initial outlay of GBP12 million to renovate and rationalise the polypropylene production line at Merseyside plant. This is done in order to make up for deferred maintenance and exploit opportunities to achieve increased efficiency. This report will look at the following four main areas of concern in order to calculate the feasibility of this Merseyside Project: * The cost of GBP2 million for the purchase of new rolling stock being allocated to the Transport Division or to the Merseyside project. * The cannibalization affect on Rotterdam sales looking at both Sales and Marketing Department views. * The modernisation of the ethylene-propylene-copolymer rubber (EPC) production line at a cost of GBP1 million. * The correct use of inflation with regards to nominal figures The report will discuss the concerns above giving a final decision on them. From these four different “hurdles” will be used to evaluate if the capital expenditure proposal for Merseyside Works should go ahead. These being: * Impact on earnings per share * Payback Period * NPV of the project (Discounted Cash Flow method) * Internal Rate of Return Background Victoria Chemicals is a major competitor in the world wide chemical industry and a leader in producing polypropylene. Victoria...
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...two mutually exclusive projects, the Merseyside project and the Rotterdam project, for the production of polypropylene When considering the Merseyside project, senior-management wants a positive impact on earnings per share. The addition to earnings per share was £28,800 with an average addition of £2,000 per year2. Calculated with erosion, the addition to earnings per share was £18,800 with an average addition of £1,100 per year2. The payback period for the project was 3.10 years, when considering the erosion of Rotterdam, this would increase to 3.46 years2. The net present value of Merseyside is £15.61 million and when considering erosion, the net present value is £11.37 million2. The internal rate of return is 33%, with the erosion, it is 28.2%2. Based on these four criteria, Merseyside is a valid project to consider. When considering the Rotterdam project, the effect on earnings per share was £6,000 with an average addition of £2,100 per year4. With the erosion of Merseyside, the earnings per share would be -£2,700 with an average addition of £1,200 per year4. The payback period of the Rotterdam project would be 13.68 years and with erosion, it would be 14.24 years4. The net present value is -£3.24 million and when considering erosion, it was -£6.61 million4. The internal rate of return is 8.04% and with erosion 5.91%4. The Rotterdam project does not meet the criteria due to a negative net present value. After analyzing each project, we would recommend that...
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...------------------------------------------------- Diamond Chemicals: The Merseyside and Rotterdam Projects Valuation and Recommendation | Table of Contents Executive Summary2 Problem Statement & Issues3 Analysis of Merseyside & Rotterdam3 The Merseyside Proposal & Analysis3 Static NPV4 Option to Switch to Japanese or German Technology4 The Rotterdam Proposal & Analysis5 Static NPV5 Option to Switch to German Technology5 Qualitative Considerations6 Recommendation7 Appendix I – Black-Scholes Model for Japanese Option8 Appendix II – Merseyside Margrabe Model for German Option8 Appendix III – Merseyside Assumptions9 Appendix IV – Merseyside Discounted Cash Flow Analysis9 Appendix V – Merseyside Depreciation Schedule10 Appendix VI – Merseyside Sensitivity Analysis11 Appendix VII – Rotterdam Margrabe Model for German Option12 Appendix VIII – Rotterdam Assumptions12 Appendix IX – Rotterdam Discounted Cash Flow Analysis13 Appendix X – Eustace’s Margin Growth Rate Error13 Appendix XI – Rotterdam Depreciation Schedule14 Appendix XII – Free Cash Flow Comparison Graph14 Executive Summary: Due to Diamond Chemical’s recent poor financial performance, it is seeking to upgrade the Merseyside plant or Rotterdam plant in order to improve performance and create value for its shareholders. The upgrade of the Merseyside plant will require a capital expenditure of £9.0 million and will increase polypropylene output by 7.0%, and increase gross margin from 11.5% to...
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...Executive Summary The board needs to question a number of cash flow decisions made in the proposal by Morris. Namely; sunk costs, cannibalization, cash flows from unrelated projects and implication of future Capex programs for the transport division into the Merseyside project. There are also a number of conflicts of interest and other ethical dilemmas that arise in the case which need to be addressed in the assessment of the project. The board needs to take action, so the overall benefit of the company is the primary objective for management and especially for such significant investment decisions. On the basis of recognizing cash flows differently from original proposal, the board should reject this Capex program at the present time, as it does not meet VC’s criteria for capital expenditure projects. Report A critical assessment of the capital-investment project at Victoria Chemicals’ Merseyside Works in Liverpool identifies a number of areas that need to be addressed through the identification of relevant cash flows; in particular, the treatment of: a. sunk costs b. cash flows obtained by cannibalizing another activity within the firm c. exploitation of excess transportation capacity d. cash flows of unrelated projects You would accept the project as the financials were originally presented. The Capex project meets 3 of the 4 assessment criteria of VC. The costs of the engineering study and corporate overhead allocation should be excluded from the analysis, as this is a sunk...
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...This project belongs in the engineering-efficiency category; therefore, it has to fit at least 3 of 4 performance hurdles, which are 1. Impact on EPS; 2.Payback; 3.Discounted cash flow and 4. Internal rate of return. In this article, some of those involved explained and described their opinions; however, professional knowledge may have been lacking. Therefore, we will expound and clarify below. Management Analysis Capital Expenditure On the surface, making sure a project measures up to a range of consistent, prescribed criteria in order to be accepted would appear to be a sound business practice. But in our opinion, we think DC only focused on the financial management. We think they should utilize the strategy map strategy. A strategy map provides a uniform and consistent way to describe that strategy, so that objectives and measures can be established and managed. The strategy map provides the missing link between strategy formulation and strategy execution. (Norton and Kaplan, 2004 *1) Furthermore, DC won't only focus on the financial report; they also manage by human resource and other strategic elements. Also, any of the above financial calculations or assumption could bring the wrong settlement or the expectations will be seriously biased. Economic / Financial Analysis Transportation Costs The transportation division asked that the cost of tank cars required for additional throughput should be involved in the initial outlay of the Merseyside's project was...
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...Diamond Chemicals: Merseyside and Rotterdam Project Investment decision analysis Group Name- fInatics Group Members- 1. Nishant Kumar (MP13037) 2. Rahul Naredi (MP13039) 3. Samardarshi Sarkar (MP13046) 4. Shadab Akhtar (MP13050) Summary About the case Diamond Chemicals is a leading producer of polypropylene, the polymer used in a variety of products (ranging from medical products to packaging film, carpet fibers, and automotive components) and is known for its strength and elasticity. Diamond Chemicals is producing polypropylene at Merseyside, England and in Rotterdam, the Netherlands. Both factories are identical in size, age, and plant design. Merseyside is a factory built in 1967. Merseyside production process is the production process that are old, the best semi-continuous, and therefore has a total workforce of more than the other plant competitors. Diamond Chemicals is under pressure from investors to improve the financial performance due to economic slowdown worldwide and also the accumulation of common stock of the company. Revenue per share has fallen to 30 Euros at the end of 2000 from around 60 Euros at the end of 1999. Original Assumptions | | | Suggested Assumptions | | Annual Output | 250000 | | Annual Output | 250000 | Output Gain/Original Output | 7% | | Output Gain/Original Output | 7% | Price/ton (Pounds Sterling) | 541 | | Price/ton (Pounds Sterling) | 541 | Inflation rate (Prices and costs) | 0% | | Inflation...
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