Diamond Chemicals PLC (A): The Merseyside Project
The objective of this report is to demonstrate to the senior management of Diamond Chemicals PLC that sufficient capital should be allocated for the proposed £9 million expenditure to renovate and rationalize the polypropylene production line at the Merseyside Plant. The Merseyside Plant is aging and therefore it is losing its competitiveness relative to some of its industry peers. Because the industry is in a downturn and “an oversupply is in the works,” Merseyside plant should be renovated now for several reasons. First, if Diamond Chemicals modernizes the Merseyside plant now, it will not lose as much in sales volume as it would if it waits for the economy to rebound. Second, Merseyside will be in a better position to exploit the market once the economy starts to recover. Third, the longer Diamond Chemicals defers maintenance and other required operational improvements, the less cost competitive the Merseyside plant will be. Fourth, if the enterprise continues to use labor intensive production techniques and antiquated technology, it will find it hard to adapt to changing consumer needs. As a result of this complacency, efficiency will be seriously hampered and the quality of output may also come into question. The implications of not modernizing are far too numerous to list them all. Therefore, with the long-term opportunities in mind, Merseyside should modernize. The final question that needs answering is whether the proposed project is financially feasible. Our calculations will show that, yes, the Net Present Value (NPV) of this project is positive. NPV is a stable measure to determine if a project is financially sound. Therefore, the foremost criteria used to determine whether or not Diamond Chemicals should allocate monetary resources to renovate its Merseyside plant is the NPV rule which states that a project should be accepted if its Net Present Value is positive.
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