Victoria Chemicals Case Study

1. Case Overview

Victoria Chemicals is a leading producer of polypropylene, a polymer used ina wide variety of products. Its executive vice president James Fawn was presentedwith two projects to improve polypropylene output for Victoria Chemicals: one for itsMerseyside plant, the other for the plant in Rotterdam.Each project had the potential for increasing production by 7%. Since acombined increase of 14% was unwarranted, James could only support one of the proposed projects. Victoria Chemicals used four criteria in the evaluation of project proposals: net present value, internal rate of return, payback period, and growth inearnings per share.Regarding the approach of the two managers in proposing their projects,Eustace (Rotterdam)

’s approach was fairly aggressive compared to Morris’

 (Merseyside)

. First, Eustace’s project proposal focuses on estimating the future value

of land rights, far

outside the scope of the firm’s core business. Second, she argues as

if there were no other option but to move ahead with the new technology, and goes asfar as to insult the Merseyside proposal. Morris, however, is more restrained in her proposition, not disregarding the new technology out of hand. Rather, she insists that

the company “wait and see” if the technology would prove itself over the comingyears. It appears that Morris’ more reserved attitude likely garnered more support for

her proposal. Eustace provides a much more thorough report, however, leading somegroup members to argue that her project would be more attractive, as there is moresupporting data and scenario analysis, resulting in fewer ambiguities. However, othermembers counter that Morris says in three pages what Eustace does in ninety, arguingthat simply having an overwhelming amount of data does not make the Rotterdam project more attractive.

2. Symptoms and Problems

Symptom 1They have two mutually exclusive capital-expenditure projects to be reviewed by the firm.The first project is to enhancing the existing facilities and the production process ofMerseyside plant. The second project is purchase pipeline and extended it to Rotterdamplant. Although this two projects can increase the output of polypropylene but they canchoose only one project to be implement.ProblemWhich project should Victoria Chemicals choose?

Symptom 2Victoria Chemical used four criteria to evaluate the two projects. The four criteria is netpresent value (NPV) computed at the appropriate cost of capital, internal rate of return (IRR),payback period and growth in earning per share. After they did the analysis, all four of thecriteria that used to evaluate both project showed different