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Victoria Chemical A Essay

896 words - 4 pages

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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 ...view middle of the document...

The preliminary engineering costs should be a sunk cost because this cost would be under taken regardless of the projects decision and should not be considered in the cash flows.
Deprecation and Rolling Stock
The use of the double declining accounting method causes expenses to be higher in the earlier years of the project reducing the cash flows. We switched to a straight-line depreciation method in order to avoid reporting lower cash flows in the earlier years of the proposal. The initial proposal did not report the purchase of new tank cars, but the need for rolling stock would be accelerated by two years if the proposal is accepted. We accounted for the GBP2 million in 2010 by subtracting it as a capital expenditure. Exhibit One and Exhibit Two depicts the above changes to the proposal and shows the change in performance criteria. The average EPS went from GBP0.022 to GBP0.0295, payback period from 3.8 years to 4.7 years, NPV went up slightly from GBP10.6 million to GBP10.8 million, and the IRR went down from 24.3% to 19.4%.

Cannibalization
The next issue to be addressed is the cannibalization of the Rotterdam plant due to the increase capacity at the Merseyside plant. We believe that the output of the Rotterdam plant will decrease by 5% from the increased 5% capacity at the Merseyside plant. We used the original DCF analysis to find approximate cash flows for the Rotterdam plant with cannibalization. We needed to use a gross profit of 11.5%, no energy savings, no investment outlay, no downtime, discount rate adjusted for inflation. Exhibit Three shows the estimated cash flow changes for the Rotterdam plant with cannibalization. Then, we had to use the cash flows from the Merseyside...

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