Case Study

Topics: Net present value, Internal rate of return, Cash flow Pages: 2 (550 words) Published: April 28, 2013
Case Summary
* Victoria Chemicals, a major company in the chemical industry, was the number one producer of polypropylene, a polymer used in various everyday items. * Victoria Chemicals at the end of 2007 was in a financial slump and was under pressure to improve their financial performance. * Due to this financial slump, Lucy Morris, the Plant Manager at Merseyside Works, proposed a GBP12 million project to help modernize the production line of polypropylene by: * Remodeling and relocating tank-car unloading areas to streamline the process * Refurbishing polymerization tanks to achieve higher pressures and throughput * Renovating the plant to increase energy savings and extrusion throughput * The predicted benefits of this project are as follows:

* There would be a lower energy requirement that equates to 1.25% of sales * A 7% increase in manufacturing throughput
* An increase in gross profit margin from 11.5% to 12.5% * There were some concerns over the project as well.
* The Transport Division projected they would need to spend GBP2 million with the project, and it should be included with the outlay of the project * The marketing department believed that this project would cause the Merseyside plant to cannibalize sales of the Rotterdam plant. * The Treasury Staff believed that a hurdle rate of 7% should be used instead of 10%. * The Assistant Manager believed that the production line of EPC, a product Victoria was the leading supplier, should be renovated as well.

Goals and Company Objectives
* Lucy Morris wants to settle questions surrounding the tank cars and cannibalization of Rotterdam. * To implement the Merseyside Project only if can meet the requirements of three of the four performance hurdles which are: * It must have a positive effect on the earnings per share of the company. * The project must have a payback period less than six years. * The...
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