Victoria Chemicals
I am pleased to share my concerns, analysis and recommendation about the Merseyside Project with you. Your DCF analysis is excellent and helpful. However, I have to make some changes to it. The memo will be divided into 6 parts.
Suggestions for Merseyside project: P1
What should change in the DCF analysis and why: P1-P3
Other important issues: P3-P4
Evaluation of each investment Criteria: P4-P5
Ultimate recommendation and forward looking: P5-P6
Revised DCF analysis: Appendix
Changes to capital project?
Since reviewing and discussing the proposal, several things have come to light and we are requesting some changes to the DCF analysis to include some potential solutions. First, it is agreed that the price for depreciation to the transport division’s equipment should not be included in the proposal. The transport division is responsible for overseeing movement of all raw, intermediate, and finished materials throughout the company and if the depreciation cost is included in the analysis it would artificially inflate profit for that division. The Transport Division and Intermediate Chemicals Group also have its own vice presidents whose pay incentives are based on the performance of the division. In this case, if the cost of depreciation for the transport cars were included in the analysis it would inflate profitability and coincidentally raise their pay incentive.
Secondly, the proposal of this project is to increase production of Polypropylene and modifying the Merseyside plant would certainly increase production but there are several other factors to be considered in this project.
1) 45 shutdown and the loss of sales
2) Request to include EPC plant modification with the proposal.
3) Cannibalization of Rotterdam plant due to increased efficiency and possible lower production costs.
Although there may be many solutions to this problem, we are proposing a possible solution that could alleviate most of the problems, but we would need a new
Suggestions for Merseyside project: P1
What should change in the DCF analysis and why: P1-P3
Other important issues: P3-P4
Evaluation of each investment Criteria: P4-P5
Ultimate recommendation and forward looking: P5-P6
Revised DCF analysis: Appendix
Changes to capital project?
Since reviewing and discussing the proposal, several things have come to light and we are requesting some changes to the DCF analysis to include some potential solutions. First, it is agreed that the price for depreciation to the transport division’s equipment should not be included in the proposal. The transport division is responsible for overseeing movement of all raw, intermediate, and finished materials throughout the company and if the depreciation cost is included in the analysis it would artificially inflate profit for that division. The Transport Division and Intermediate Chemicals Group also have its own vice presidents whose pay incentives are based on the performance of the division. In this case, if the cost of depreciation for the transport cars were included in the analysis it would inflate profitability and coincidentally raise their pay incentive.
Secondly, the proposal of this project is to increase production of Polypropylene and modifying the Merseyside plant would certainly increase production but there are several other factors to be considered in this project.
1) 45 shutdown and the loss of sales
2) Request to include EPC plant modification with the proposal.
3) Cannibalization of Rotterdam plant due to increased efficiency and possible lower production costs.
Although there may be many solutions to this problem, we are proposing a possible solution that could alleviate most of the problems, but we would need a new