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Victoria’s Secret Chemicals
Executive Summary Victoria Chemicals’ Merseyside Works production process is old and inefficient compared to its’ competitors. In order to remain competitive, management limited maintenance and other capital expenditures. As a result of competitors’ efficiency, earnings fell from 250 to 180 pence per share in 2007. Corporate raider Sir David Benjamin created an urgency to improve performance and a proposal was made. However, Frank Greystocks’ DCF analysis and project proposal is under scrutiny due to concerns that some of the assumptions made are not accurate misrepresenting an accurate NPV and IRR. This analysis will address these wrong assumptions with the proper inputs in our own DCF model and prove that the proposal is not as appealing as the original, yet still a worthy investment.
Introduction
In the original analysis we identified several issues that needed to be addressed. These issues are: discount rate does not account for inflation, output level needs to be more conservative, improper allocation of engineering cost, the use of double declining depreciation method, the accelerated cost for new rolling stock was not included, and the cannibalization of sales. We will address these issues starting with the adjustment of the discount rate and output level.

Inflation/Output Levels and Sunk Cost
The initial proposal used a nominal discount rate of 10% instead of the real rate of 7% when the 3% inflation is factored into the required rate of return. In our assumptions, we changed the rate to include inflation resulting in a new discount rate of 7%. The initial proposal estimated that this project would increase production by 7%. However, this assumes that we would be operating the plant at full capacity and will regain the customers we lost due to competition from the plant being closed for 45 days. In our