Merseyside

In: Business and Management

Submitted By fouadghandour
Words 1912
Pages 8
Table of Contents

Executive Summary: 1
Problem Description: 2
Analysis & Recommendation 3
Conclusion: 7

Diamond Chemicals Plc

Executive Summary:

Diamond Chemicals - one of the global leaders in production of polypropylene, a polymer used in an extremely wide variety of products from carpet fibers to automobile parts was under financial pressure, After a worldwide economic slowdown and accumulation of shares by a single investor Sir David Benjamin, Diamond Chemicals, with earning per share dropping in half over a year’s time £60.00 in 1999 to £30.00 in 2000.

The declining financial situation along with Merseyside’s outdated process flows and labor intensive operation has triggered Merseyside’s Plant Manager – Lucy Morris to develop and present a capital project plan to senior management which aims at renovating the production line which would result in increased throughputs and energy savings thereby building higher competitive advantage over its 7 other major rivals in the chemical production business.

While the idea and benefits of the project seemed pretty clear to the Plant Manager herself, Diamond Chemicals followed a systematic approach to approving capital projects taking into consideration 4 distinctive performance factors: * Impact on earnings per share * Payback * Discounted Cash Flow * Internal Rate of Return

This report examines the overall journey Lucy Morris and her Controller Fred Greystock had to undergo while preparing to present the project and the roadblocks such a capital project would face when presented to management in the form of constraints, disagreement and resistance to change from the concerned departments and how they prepared to engage with those stakeholders to ensure the project of modernized production facility is accepted in order to achieve their ultimate goal of optimized profitability.…...

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...Assignment 6 Merseyside 1a. We recommend that Frank Greystock make the following changes his discounted cash flow analysis: -Increase inflation to 3% -Remove the sunk preliminary engineering cost of 500,000 dollars. -For the companies consideration we have also calculated the cannibalization rate of Rotterdam sales. 1b. Memo to the Transport Division: From:Ms. Morris To: Transport Division Subject: Greystocks preliminary DCF I recommend that the rolling stock purchases not be included in the Merseyside discounted cash flow analysis. These purchases are not direct costs associated with the project. Since executive VP of each division receive an annual bonus based on the performance of their division. An agency problem would come about since the Transport Division would have no initial costs associated with the Merseyside project, yet would receive all the benefits resulting from its implementation. 2b. Memo to the Director of Sales From:Ms. Morris To: Director of Sales Subject: Greystocks preliminary DCF 3b. Memo to the Griffin Tewitt From:Ms. Morris To:Griffin Tewitt Subject: Greystocks preliminary DCF I do not recommend that the costs linked to the EPC project be included in the Merseyside discounted cash flow analysis. Since the EPC project has an already determined negative net present value, I do not think that its inclusion in the Merseyside project will maximize shareholder value. 4b. From:Ms. Morris To: Andrew......

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The Merseyside Project

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...Diamond Chemicals PLC Executive Summary Diamond Chemicals is considering two mutually exclusive projects, the Merseyside project and the Rotterdam project, for the production of polypropylene When considering the Merseyside project, senior-management wants a positive impact on earnings per share. The addition to earnings per share was £28,800 with an average addition of £2,000 per year2. Calculated with erosion, the addition to earnings per share was £18,800 with an average addition of £1,100 per year2. The payback period for the project was 3.10 years, when considering the erosion of Rotterdam, this would increase to 3.46 years2. The net present value of Merseyside is £15.61 million and when considering erosion, the net present value is £11.37 million2. The internal rate of return is 33%, with the erosion, it is 28.2%2. Based on these four criteria, Merseyside is a valid project to consider. When considering the Rotterdam project, the effect on earnings per share was £6,000 with an average addition of £2,100 per year4. With the erosion of Merseyside, the earnings per share would be -£2,700 with an average addition of £1,200 per year4. The payback period of the Rotterdam project would be 13.68 years and with erosion, it would be 14.24 years4. The net present value is -£3.24 million and when considering erosion, it was -£6.61 million4. The internal rate of return is 8.04% and with erosion 5.91%4. The Rotterdam project does not meet the criteria due to a......

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