Victoria Chemicals Case

Team 2 Case Write Up

Victoria Chemicals

Section I - Statement of the Problem

                 Victoria Chemicals is one of the leading firms in the chemical industry worldwide. Victoria Chemicals is a leading producer of polypropylene, a polymer which is known for its strength and malleability, that is used in a plethora of products such as carpet fibers and packaging film. James Fawn is the executive vice president of the Intermediate Chemicals Group (ICG) of Victoria Chemicals. In February 2008, Fawn faced a dilemma. Plant managers in Liverpool and Rotterdam both independently submitted capital expenditure proposals to expand their respective polypropylene output by 7%. Both proposals had advantages and disadvantages, however Fawn could not accept both projects. “Victoria Victoria Chemicals’ strategic-analysis staff argued strenuously that a company-wide increase in polypropylene output of 35,000 tons made no sense but half that amount did.”

Problem: Which capital expenditure project was holistically, financially better for Victoria Chemicals. Each project would have to be presented to the board of directors for approval. Capital expenditure proposals were evaluated based on four criteria: (1) net present value (NPV) computed at the appropriate cost of capital, (2) internal rate of return (IRR), (3) payback, and (4) growth in earnings per share. Furthermore, the board also took “strategic factors” into consideration, meaning those macro economic risk or incentives that couldn’t necessarily be quantified. However, these evaluation methods still have a lot of ambiguity. James also wants to evaluate the primary technological differences between the Liverpool and Rotterdam proposals.

Section II – Alternative Solutions

1. Victoria Chemicals can increase its current production of polypropylene by 7%, by selecting the Rotterdam, South Holland capital expenditure proposal.
2. Victoria Chemicals can increase its current production of polypropylene by 7%, by selecting the Merseyside, Liverpool capital expenditure proposal.

Section III – Analysis of the Alternatives

Rotterdam -                  

                 Rotterdam had a more thought out and complex business plan. Rotterdam’s projected proposal focused on estimating the future value of land rights, something outside of the firm’s natural scope of business. The manager of Rotterdam also integrated the benefits of modern technology into her approach. Her proposal alluded to the opinion that technology was not only going to make Victoria Chemicals better but was necessary for Victoria Chemicals to continue to compete at a international level. With Rotterdam’s elaborate approach and a convincing proposal, group members initially favored it more over Merseyside, Liverpool. As each capital expenditure project is evaluated on the 4 main criteria of Net Present Value, Internal Rate of Return, Payback Period and Growth in earnings per share we decided to estimate these individual proposals. The Net Present Value, Internal Rate of Return, Payback Period and Growth in earnings per share for the Rotterdam proposal was £15.5 million pounds, 18%, 7.95 years and $0.048 cents per share respectively. Net Present Value, which is the Future value of all estimated Free cash flows discounted at 10% is the most important figure. Each of these measures such as NPV, IRR and payback period helps firm evaluate capital expenditure project, however they each have their pros and cons. It is generally accepted that NPV is the best option.  A positive NPV means that the project should be accepted on its own, but since it is not feasible to accept both projects, we will also have to calculate these figure for the Merseyside Project.