Victoria Chemical Plc (A)
VICTORIA CHEMICALS PLC
Ricky Tjayadi 01120120028
Young Jung Kim 01120120201
Irene 01120120214
VICTORIA CHEMICALS PLC
The Background
Victoria Chemicals, a major company in the chemical industry, was the number one producer of polypropylene, a polymer used in various everyday items. Victoria Chemicals at the end of 2007 was in a financial slump and was under pressure to improve their financial performance. Due to this financial slump, Lucy Morris, the Plant Manager at Merseyside Works, proposed a GBP12 million project to help modernize the production line of polypropylene by remodeling and relocating tank-car unloading areas to streamline the process, refurbishing polymerization tanks to achieve higher pressures and throughput, and renovating the plant to increase energy savings and extrusion throughput. The predicted benefits of this project are there would be a lower energy requirement that equates to 1.25% of sales, a 7% increase in manufacturing throughput, and an increase in gross profit margin from 11.5% to 12.5%. There were some concerns over the project as well. The Transport Division projected they would need to spend GBP2 million with the project, and it should be included with the outlay of the project. The marketing department believed that this project would cause the Merseyside plant to cannibalize sales of the Rotterdam plant. The Treasury Staff believed that a hurdle rate of 7% should be used instead of 10%. The Assistant Manager believed that the production line of EPC, a product Victoria was the leading supplier, should be renovated as well.
Question & answer
1. What changes, if any, should Lucy Morris ask Frank Greystock make in his discounted cash flow (DCF) analysis? Why? What should Morris prepared to say to the Transport Division, the director of sales, her assistant plant manager, and the analyst from the Treasury Staff?
We think the best way is to exclude sunk cost, change the
Ricky Tjayadi 01120120028
Young Jung Kim 01120120201
Irene 01120120214
VICTORIA CHEMICALS PLC
The Background
Victoria Chemicals, a major company in the chemical industry, was the number one producer of polypropylene, a polymer used in various everyday items. Victoria Chemicals at the end of 2007 was in a financial slump and was under pressure to improve their financial performance. Due to this financial slump, Lucy Morris, the Plant Manager at Merseyside Works, proposed a GBP12 million project to help modernize the production line of polypropylene by remodeling and relocating tank-car unloading areas to streamline the process, refurbishing polymerization tanks to achieve higher pressures and throughput, and renovating the plant to increase energy savings and extrusion throughput. The predicted benefits of this project are there would be a lower energy requirement that equates to 1.25% of sales, a 7% increase in manufacturing throughput, and an increase in gross profit margin from 11.5% to 12.5%. There were some concerns over the project as well. The Transport Division projected they would need to spend GBP2 million with the project, and it should be included with the outlay of the project. The marketing department believed that this project would cause the Merseyside plant to cannibalize sales of the Rotterdam plant. The Treasury Staff believed that a hurdle rate of 7% should be used instead of 10%. The Assistant Manager believed that the production line of EPC, a product Victoria was the leading supplier, should be renovated as well.
Question & answer
1. What changes, if any, should Lucy Morris ask Frank Greystock make in his discounted cash flow (DCF) analysis? Why? What should Morris prepared to say to the Transport Division, the director of sales, her assistant plant manager, and the analyst from the Treasury Staff?
We think the best way is to exclude sunk cost, change the