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Victoria Chemicals Case Study 1 Victoria Chemicals (a) Mba9005 Ashley James

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Project Risk and Cost Management
Case Study
Diamond Chemicals PLC (A): The Merseyside Project

Group Members: Divya Yadav, Lamia Nafees, Ashwin Chadaga, Deeshanu Sharma

Executive Summary
This summary report provides an analysis and estimation of capital budgeting proposed that is being proposed to the Senior Management in Diamond Chemicals. The goal of this project was to save energy, improve process flow and product outputs of the Diamond Chemical Merseyside factory.
Diamonds Chemicals, a major competitor in the worldwide chemical industry and a leader in the producer of polypropylene. Lucy Morris, the plant manager estimated £9 million project expenditure to renovate and rationalize the polypropylene production line at the Merseyside Plant in order to make up for deferred maintenance and exploit opportunities to achieve increased production efficiency. The Merseyside plant was constructed in 1967. Diamond Chemicals produced polypropylene at two sites, Merseyside and in Rotterdam, Holland. The company was a supplier to customers based in Europe and in the Middle East. In order for the project to take place the entire polymerization line would need to be closed for 45 days, however, and because the Rotterdam plant was operating near capacity, Merseyside’s customers would buy from competitors. Frank Greystock, the controller at Diamond Chemicals believed that the loss of customers would just be temporary. As a result, the benefits would consist of lower energy requirement as well as a 7 percent greater manufacturing throughput. In addition, the project was expected to improve gross margin (before depreciation and energy savings) from 11.5 percent to 12.5 percent. Currently, Merseyside produces 250,000 metric tons of polypropylene pellets a year. The price of polypropylene averaged £541 per ton for Diamond Chemicals’

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Victoria Chemicals

...Case Study 1 Victoria Chemicals (A) MBA9005 Ashley James 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...

Words: 1062 - Pages: 5