Diamond Chemicals Plc (a): the Merseyside Project

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Diamond Chemicals is a leading producer of polypropylene, the polymer used in a variety of products (ranging from medical products to packaging film, carpet fibers and automotive components) and is known for its strength and elasticity. Diamond Chemicals is producing polypropylene at Merseyside (England) and in Rotterdam (Netherlands). Both factories are identical in size, age and plant-design. They were both built in 1967. Merseyside production process is the production process that are old, the best semi-continuous and therefore has a total workforce of more than the plant competitors. Since its establishment in 1967, Diamond Chemicals failed to jump in on opportunity and enhance their production process; for the way they produced chemicals was old, outdated and cost the plant far more than its competitors. Therefore Lucy Morris is being appointed to her post almost a year ago, proposed a £9 million expenditure plan as a solution. The solution is aimed at developing new methods for the production of polypropylene. Capital-expenditure

Diamond Chemicals evaluate its capital-expenditure by four different categories. (1) New product market, (2) product or market extension, (3) engineering efficiency or (4) safety for environment. Merseyside Project goes under category (3) which is engineering efficiency. With this project comes some concerns and that is why evaluating capital expenditure proposals can become such a complicated scheme. With Merseyside categorized as an engineering efficiency, it needs to meet a few requirements. The first one is impact on earnings per share (EPS). Whether this measure will have a positive effect or not. The additional EPS in this capital-expenditure will be approximately 0.1005. This means that the impact is positive. Second is the payback time. Thus, how long time it will take to amortize the initial project outlay by calculating the free cash flow. For engineering efficiency projects, it should be within six years. This...
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