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 cash flow evaluates the dollar contribution of the project to shareholders.
(4) IRR evaluates the return on the original expenditure invested. Can afford higher WACC

This evaluation scheme above enables the firm to analyse capital-expenditure project from different angle and prospective.

DCF depends too much on assumptions

Changes on Grevstock’s DCF Analysis
1. Sunk Cost