Victoria Chemicals Report

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Introduction

The following report shows that the proposal of the modernisation project should obtain funding from the corporate headquarters of Victoria Chemicals.
The project has an initial outlay of GBP12 million to renovate and rationalise the polypropylene production line at Merseyside plant. This is done in order to make up for deferred maintenance and exploit opportunities to achieve increased efficiency.

This report will look at the following four main areas of concern in order to calculate the feasibility of this Merseyside Project:

* The cost of GBP2 million for the purchase of new rolling stock being allocated to the Transport Division or to the Merseyside project.

* The cannibalization affect on Rotterdam sales looking at both Sales and Marketing Department views.

* The modernisation of the ethylene-propylene-copolymer rubber (EPC) production line at a cost of GBP1 million.

* The correct use of inflation with regards to nominal figures

The report will discuss the concerns above giving a final decision on them. From these four different “hurdles” will be used to evaluate if the capital expenditure proposal for Merseyside Works should go ahead. These being:

* Impact on earnings per share

* Payback Period

* NPV of the project (Discounted Cash Flow method)

* Internal Rate of Return

Background

Victoria Chemicals is a major competitor in the world wide chemical industry and a leader in producing polypropylene. Victoria Chemicals was under pressure from investors to improve its financial performance because of the accumulation of the firms’ common shares by corporate raider, Sir David Benjamin. Earnings had fallen to 180 pence per share at the end of 2007 from around 250 pence per share at the end of 2007.

Polypropylene can be used for a wide variety of products, known for its strength and malleability and is essentially priced as a commodity. The basic production of polypropylene pellets starts with propylene, a gas obtain through the refining of crude oil. There are two stages in the process, first being polymerisation making polypropylene, followed by additives being added to achieve the desired attributes the customer need.

The Merseyside plant was constructed in 1967, at the same time as the Rotterdam plant, Holland was built by Victoria Chemicals. Both plants are identical in scale and design, with both plants mangers reporting to James Fawn, executive vice president and manager of Intermediate Chemicals Group (ICG) of Victoria Chemicals. The company supplies to customers in Europe and the Middle East. The Merseyside plant production process is old, semicontinuous, therefore being higher in labour cost compared to its competitors with new plants. This has come about through deferral of maintenance the 5 years preceding Lucy Morris becoming plant manager at Merseyside plant.

Concerns of the Transport Division

The Transport Division is a cost centre which overlooks the movement of all raw, intermediate and finished materials throughout Victoria Chemicals and is responsible for managing the tank cars associated with this. The Merseyside project would increase throughput, thereby transport having to increase its allocation out of excess capacity. In doing so, this would accelerate from 2012 to 2010 the need to purchase the new rolling stock estimated at GBP2 million. The controller of the transport division in a memorandum suggested that the cost of the tank cars should be included in the initial outlay of the Merseyside project.

The cost of the tanks has not been included in the Merseyside Project discounted cash flow (DCF) analysis as it is not a direct cost associated with this project. The transport division is in charge of managing the tank cars associated with movement of all raw materials making it a direct cost to them. For instance, if there is less demand in one period for a product and therefore less transport is...
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