CASE STUDY 22: VICTORIA CHEMICALS PLC(A)
CAPITAL BUDGETING DECISIONS
SUBMITTEDTO: DR.RAJA NAG
PREPARED BY: SEVTAP BATIR
NYIT School of management Report CASE 22
In 2007, Victoria Chemicals experienced a significant drop in its improve its performance as its earnings had fallen 38% from 250 pence per share to 180 pence per share in a year. In addition, Victoria Chemicals saw the accumulation of its common shares by a well-known corporate raider named Sir David Benjamin. Victoria has higher cost and lower revenue problem. Victoria has 250.000 ton production figure. Based on Merseyside project Victoria chemical would experience 12.5%decrease in production which makes their production undersupply because their production is already maximum capacity. This 12.5% comes from 1.5 month which is 45 days in which the plants would be shut down for construction. Equation is Reduction in output= (250.000/12)*1.5
Before we talk about Greystock’s DCFs, we would like to remind %30 of tax rate in the capital expenditure analysis and engineering cost of GBP500.000 due to the renovate. Greystock’s discounted cash flow a suggest that the company would earn a 10% return on the project, even though the Treasury staff believed the real return to be 7% due to a 3% in inflation per year. However, Greystock decided to continue to use a discount rate of 10%. It was the figure promoted in the latest edition of the company’s capital-budgeting manual. The high discount rate was problematic because, if the 7% figure was more accurate, using the 10% of rate would cause the company to accept projects that should be rejected. On another note, Griffin Tewitt, assistant plant manager and Morris’s direct subordinate, Proposed that Greystock modify his proposal to include a renovation of the EPC...