...Victoria Chemicals PLC (A): The Merseyside Project Capital Budgeting Case Analysis ------------------------------------------------- DeQuincy Adamson Donald Harrell Lekisha McKinley Taylor Wolfe Finance 5387 Spring 2012 Victoria Chemicals: Case Background Victoria Chemicals was a major competitor in the chemical industry worldwide. The company was the leading producer of polypropylene, a polymer that is used in a variety of products including carpet fibers, packaging, and automobile parts. Polypropylene was essentially priced as a commodity. In order to meet demand, Victoria Chemicals produced and manufactured polypropylene at two plants, the Merseyside Works plant in Liverpool, England, and the Rotterdam facility in Rotterdam, Holland. The plants were built in 1967 and are identical in scale and design. Additionally, managers of both plants reported to James Fawn, the executive vice president and manager of the Intermediate Chemicals Group (ICG). The production of polypropylene pellets begins at Merseyside with propylene, a refined gas received in tank cars known as propylene. The production process consisted of two stages: In the first stage, the gas form of polypropylene was combined with a solvent in a pressurized vessel and then concentrated and collected in a centrifuge. Next, the polypropylene was mixed with stabilizers, modifiers, fillers, and pigments in order to create the final product, a plastic pellet, which is shipped to the customer. The company...
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...group 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...
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...Case study Victoria Chemicals (A): The merseyside Project Summary Victoria Chemicals is one of the leading producers of Polypropylene, a polymer that is used in many products ranging from carpet fibers, automobile components, packaging film and more. Polypropylene was essentially priced as a commodity. In order to meet demand, Victoria Chemicals had two production plants located in Liverpool, England (Merseyside) and another in Rotterdam, Holland. The Merseyside plant was built in 1967 and was leading production facility until the 21st Century. The company positioned itself as a supplier to customers in Europe and the Middle East. In addition to small producers, seven major competitors manufactured polypropylene in Victoria Chemicals’ market region (Exhibit 1). Many new competitors have recently built newer plants with more efficient systems and this has taken a toll on Victoria’s bottom line. The Merseyside plant was in need of drastic renovations as a result of decades of deferred maintenance, falling earnings and higher labour content as compared to competitors. The upgrades needed included a complete restructuring of the production flow and pressure vessels to obtain more efficient outputs. This project would require an initial investment of GBP 12 million that will potentially save energy and improve production processes. The plant had noticed a decline in the stock price from 250 pence per share in 2006 to 180 pence per share in 2007. Facing pressure from the...
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...victoria chemical EPPM3644 KEWANGAN KORPORAT DAN PENSTRUKTURAN SET: 3 REPORT OF CASE STUDY: CASE 24 VICTORIA CHEMICALS PLC (A) THE 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...
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...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...
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...#Case 5 Victoria Chemicals Scheme analysis Since the Merseyside project is identified as belonging to the engineering-efficiency category, its capital-expenditure proposals are subject to meet at least three of four performance criteria: First, the contribution to net income from the project is positive. This criterion is measured as whether the average annual addition to earnings per share (EPS) is greater than zero. It is important because it somehow shows the profitability, and investors might regard it as an essential data. Second, the payback period is not more than six years. This criterion is defined as the number of years necessary for free cash flow of the project to amortize the initial project outlay completely. A short payback period is desirable, which means the costs are recovered fast, and thus the project is considered less risky and more favorable. It is easy to apply and understand, and useful to compare with other investment plans. Third, the net present value (NPV) of free cash flow is positive. This criterion is calculated as the present value of future cash flows of the project less the initial investment outlay. It is a determinant of whether to undertake the project. A project with a positive NPV is believed acceptable. The higher the NPV, the better the project. Also, it is a good method to evaluate the project because it takes all the relevant costs in account and gives explicit consideration to the time value of money. Fourth, the internal...
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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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...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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...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 Chemicals was under pressure from investors to improve its financial performance...
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...Exhibit 2 VICTORIA CHEMICALS (A) Frank Greystock's DCF Analysis of Merseyside Project (financial values in millions of British pounds) Assumptions Annual Output (metric tons) Output Gain/Original Output Price/ton (pounds sterling) Inflation Rate (prices and costs) Gross Margin (ex. Deprec.) Old Gross Margin Energy Savings/Sales Yr. 1-5 Yr. 6-10 Yr. 11-15 250,000 7.0% 675 3.0% 12.50% 11.5% 1.25% 0.75% 0.0% 1 Year Now 2008 1. Estimate of Incremental Gross Profit New Output (tons) 267,500 Lost Output--Construction (33,438) New Sales (Millions) 157.99 New Gross Margin 13.8% New Gross Profit 21.72 Old Output Old Sales Old Gross Profit Incremental Gross Profit 250,000 168.75 19.41 2.32 2. Estimate of Incremental WIP inventory New WIP inventory 4.09 Old WIP inventory 4.48 Incremental WIP inventory -0.39 3. Estimate of Incremental Depreciation New Depreciation 1.60 Depreciation 2010 Depreciation 2012 Incremental Depreciation 1.60 4. Overhead 0.00 5. Prelim. Engineering Costs 0.00 Pretax Incremental Profit 0.72 6. Cash Flow Adjustments Less Capital Expenditures -12.00 Add back Depreciation 1.60 Less Added WIP inventory 0.39 7. Free Cash Flow -12.00 2.49 NPV = IRR = 16.78 29.6% Discount rate Tax Rate Investment Outlay (mill.) Depreciable Life (years) Salvage Value WIP Inventory/Cost of Goods Months Downtime, Construction Preliminary Engineering Costs Overhead/Investment 2 2009 267,500 ...
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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...
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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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...in Liverpool Plains. The Lock the Gate Alliance focusses on agricultural communities all over Australia that are affected by mining that will damage the fertility of the land. On their Gunnedah Basin and Liverpool Plains section, they express the beauty and usefulness of the land and the impact that the mining can and is having on the country. All of these organisations have their own websites that also use social media to promote their cause. On the Lock the Gate Alliance YouTube channel they use personal stories and promote how agriculturally rich the area is. The Queensland government said they will protect the urban areas from mining but NSW and Victoria responded by saying that they will not follow suit. On the 21st July 2011, the NSW Government placed new conditions on coal seam gas mining which banned the use of toxic chemicals such as benzene, toluene, ethylbenzene and xylenes. They also placed a suspension on the use of hydraulic fracturing during the drilling process. Hydraulic fracturing is the process of breaking rock by hydraulically pressurised liquid. Recently in September 2014 the NSW Department of Planning and Environment has allowed a new coal mine in the North of Gunnedah to be owned by Whitehaven Coal. Considering the damage that the Coal Seam Gas mining has caused, it has allowed the community to bond together to fight for a cause that affects all of them. In doing this they are also joining with other surrounding communities that are effected by coal seam...
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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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...The charity i chose is rscpca. when and where did it start? The RSPCA’s dates all the way back to 1871, when a public meeting to discuss the treatment of I'll horses in Victoria ended up forming into Australia’s first Society for the Prevention of Cruelty to Animals. After the establishment in Victoria soon followed the other states: Tasmania in 1872; New South Wales in 1873; South Australia in 1875; Queensland in 1883; Northern territory 1955 and Western Australia in 1892. In 1923 the Societies were given the Royal Warrant, becoming known as the Royal Societies for the Prevention of Cruelty to Animals. (RSPCA) what does it do and where in the world does it operate? The RSPCA is an australian community based charity that works to prevent cruelty to animals by actively promoting their care and protection. The RSPCA not only shelters and takes care of animals they also pick up strays or missing animals on the streets and take them back in to protection untill someone picks them up. This has happened to my dog many times an withought the RSPCA It probably would have been hit by a car or lost. So I'm very thankful for the RSPCA. Why for the RSPCA deserve people time and money more than other charities? The RSPCA deserves people time and money the most because people don't realise how badly animals are being treated and how unfair most of there lives are. the RSPCA is doing there best to save as many of these as they can, with our helping hand we can together...
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