EXECUTIVE SUMMARY This report mainly provides analysis and evaluation of a capital budgeting project proposed to Senior Management in Diamond Chemicals. The project has been proposed to improve the product output of Diamond Chemicals’ Merseyside factory. However, recently, problems such as capital expenditure, marketing cannibalization, discount rate, etc. have surfaced from different departments. Diamond Chemicals need to take all these factors into consideration and eventually decide whether or not they should carry out this project. Methods of analysis include the evaluation of impact on Earnings per Share (EPS), payback period, Discounted cash flow (NPV analysis), and Internal Rate of Return (IRR). The report finds that the project will benefit Diamond Chemicals, and it is applicable. However, in order to make a desirable impact, Diamond Chemicals will have to: 1. Include the £2 million cost of tank car purchase as the capital expenditure of Merseyside’s capital program. 2. Include the potential loss of business at Rotterdam caused by the capital project in the analysis...... Diamond Chemicals Ltd. (A): The Merseyside Project
Diamond Chemicals PLC (a)
Case Studies in Finance, Bruner, 4th
Advance Study Questions:
What changes, if any, should Lucy Morris ask Frank Greystockto make in his discounted cash flow analysis? Why? What should Morris be prepared to say to the Transport Division, the Director of Sales, her assistant plant manger, and the analyst from the Treasury staff? How attractive is the Merseyside project? By what criteria? Should Morris continue to promote the project for funding? Critique the way in which Diamond Chemicals evaluates its capital-expenditure proposals (i.e., its capital budgeting techniques). Give an in-depth analysis based upon class discussion and the text. You may also draw upon previous courses' material (i.e., FIN...