Victoria Chemicals Plc(b): Merseyside and Rotterdam Projects

Case #4

Victoria Chemicals PLC(B): Merseyside and Rotterdam Projects

Jessica Green

@02620872

10/02/12

I. Statement of the Problem

The firm highlighted in the following business case is Victoria chemicals a European company that is a major player in the chemicals industry. It is a top producer polypropylene. The polypropylene is produced at two plants the Merseyside and Rotterdam. In this case each of the two plants submitted mutually exclusive projects that they strongly believe will help increase output and economic profit within the company. The importance of the projects is that Victoria Chemicals faces pressure from its investors to improve its financial performance. The issue that the Victoria Chemicals leadership must decide is which of the two projects would be more beneficial to the company. The company does in fact have criteria for evaluating capital expenditure proposals which include the following: projects impact on eps (earnings per share), pay period of the project, dcf (discounted cash flow), and irr (internal rate of return). Although the criteria used by Victoria Chemicals to evaluate projects are similar to other firms the problem is which project to pick when they are mutually exclusive, meaning one project is picked and the other forfeited. In this case it is even more complicated when both meet the criteria the Victoria Chemicals has set for projects to be accepted and when they both are in the same category of engineering-efficiency category.

II. Alternative Solutions

After reading the case about the firm Victoria Chemicals there are three key options for the firm.

Option 1- Accept the Merseyside project

Option 2- Accept the Rotterdam project

III. Analysis of the Alternatives

Option 1- Accept the Merseyside project

The reasons for accepting the Merseyside project are simple and are based on the concept of having a project that you are fairly certain will be successful. Because the Merseyside project deals with the maintenance of the Merseyside facility, saving of energy and improving the process flow it seems very realistic. The numbers also agree with such a project even when you add in the concerns of the Transport department into the DCF model. For instance, if we change the Initial investment to 14million(pounds) to include the 2million for the rolling stock and change the depreciation to 10 years instead of 15 we still see a positive NPV at 8.78 million and an IRR at 20.8%(See Appendix). Although those changes still make the NPV positive other considerations must evaluated, such as the possibility of having to shift capacity to away from Rotterdam toward Merseyside and if this has any financial impact. Greystock's statement that the issue is not a cash flow one is very accurate, but it is important that the project takes business away from other plants and not from the Rotterdam plant. Another is the shutting