American Chemical

Topics: Laminate, Chlorine, Risk Pages: 2 (385 words) Published: September 19, 2013
Cost of equity and the WACC (see Table 1)
Because US future risk premium ranges from 3% to 5%, the risk premium used in this case is 4%. In terms of unlevered beta of assets, we used average of the companies that is specialized for 21`only. Based on all above judgements, calculated cost of equity is 15.37%, and WACC is 12.01%. Calculation of NPVs

Table 2 and Table 3 show the next 10 years cash flow of the Collinsville Plant without and with laminated graphite electrodes. Using the calculated WACC as the discount rate, the NPVs results are approximately -1.1 million without laminated electrodes and 10.3 million with laminated electrodes. According to the NPV calculated from DCF, the Collinsville proposal with laminated graphite electrodes looks much more attractive than without them. Issues beyond the DCF analysis

According to the case, the development of lamination is only 40% completed. The scenario with laminated graphite electrodes depends on successful development and implementation of the new technology and to how much extent it would help in increasing performance in reality. In addition, there are many other factors to be considered beyond DCF analysis: the unpredictable US economic trend such as the coming early 1980s recession, the increase in competition in production of sodium chlorate due to new sodium chlorate producers, new bleaching technology in paper production with less demand of sodium chlorate, and raise of new technology in replacement of laminate technology. Recommendations to Dixon's CEO

* Based on our calculation, it is recommended to go for the Collinsville proposal with laminated graphite electrodes technology. Nonetheless, there in an upside of gaining approximately 10.3 million and a downside of losing approximately 1.1 million if the new technology is not successfully developed and implemented. Dixon’s CEO must be comfortable with the risk of losing 1.1 million due to a possible failure on the development and installation of...
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