Synopsis and Objectives
The identification of relevant cash flows; in particular, the treatment of:
cash flows obtained by cannibalizing another activity within the firm
exploitation of excess transportation capacity
corporate overhead allocations
cash flows of unrelated projects
The critical assessment of a capital-investment evaluation system.
The treatment of conflicts of interest and other ethical dilemmas that may arise in investment decisions.
What changes, if any, should Lucy Morris ask Frank Greystock to make in his discounted cash flow (DCF) analysis? Why? What should Morris be prepared to say to the Transport Division, the Director of Sales, her assistant plant manager, and the analyst from the Treasury Staff?
How attractive is the Merseyside project? By what criteria?
Should Morris continue to promote the project for funding?
1. Why are the Merseyside and Rotterdam projects mutually exclusive? 2. How do the two projects compare on the basis of Victoria Chemicals' investment criteria? 3. Is it possible to quantify the value of managerial flexibility associated with the Merseyside project? How, if at all, does this flexibility in style affect the economic attractiveness of the project? 4. What are the differences in the ways Elizabeth Eustance and Lucy Morris have advocated their respective projects? How might these differences in style affect the outcome of the decision? 5. Which project should James Fawn propose to the chief executive officer and the board of directors?
Excerpts from Morris’s Expenditure Proposal Memo Regarding the Merseyside Project
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