3. Case Study 24, Victoria Chemicals plc (A): The Merseyside Project
Read the case and discuss the merits of the Greystock Analysis presented at the end of the case. On page 354-355, the author lists four financial criteria by which to judge the merits of the project. Exhibit 2 shows the calculations and results for the four criteria. Of the investment recommendation data presented, which criterion do you feel is most reliable to recommend to management, and on what basis to you make your recommendation? Compare and contrast the merits of the 4 criteria discussed in the case. Do you agree with the analysis?
James Fawn, executive vice president of the Intermediate Chemicals Group (ICG) of Victoria Chemicals, planned to meet with his financial analyst, John Camper- down, to review two mutually exclusive capital-expenditure proposals. The firm's capital budget would be submitted for approval to the board of directors in early February 2008, and any projects Fawn proposed for the ICG had to be forwarded to the CEO of Victoria Chemicals soon for his review. Plant managers in Liverpool and Rotterdam had independently submitted expenditure proposals, each of which would expand the polypropylene output of their respective plants by 7% or 17,500 tons per year.1 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. Thus, Fawn could not accept both projects; he could sponsor only one for approval by the board. Corporate policy was to evaluate projects 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. In addition, the board of directors was receptive to "strategic factors-considerations that might be difficult to quantify. The manager of the Rotterdam plant, Elizabeth Eustace, argued yocifer- gusly that her project easily surpassed all the relevant quantitative standards and that t had important strategic benefits. Indeed, Eustace had interjected those points in two recent meetings with senior management and at a cocktail reception for the board of directors. Fawn expected to review the proposal from Lucy Morris, manager of Merseyside Works, the Liverpool plant, at the meeting with Camperdown, but he sus- pected that neither proposal dominated the other on all four criteria. Fawn's choice would apparently not be straightforward. The Proposal from Merseyside, Liverpool The project for the Merseyside plant entailed enhancing the existing facilities and the prouction process. Based on the type of project and the engineering studies, the potential benefits of the project were quite certain. To date, Morris had limited her discussions about the project to conversations with Fawn and Camperdown. Camper- down had raised exploratory questions about the project and had presented prelimi- nary analyses to managers in marketing and transportation for their comments. The revised analysis emerging from those discussions would be the focus of Fawn's dis- cussion with Camperdown in the forthcoming meeting Camperdown had indicated that Morris's final memo on the project was only three pages long Fawn wondered whether this memo would satisfy his remaining questions. The Rotterdam Project James Fawn, executive vice president of the Intermediate Chemicals Group (ICG) of Victoria Chemicals, planned to meet with his financial analyst, John Camper- down, to review two mutually exclusive capital-expenditure proposals. The firm's capital budget would be submitted for approval to the board of directors in early February 2008, and any projects Fawn proposed for the ICG had to be forwarded to the CEO of Victoria Chemicals soon for his review. Plant managers in Liverpool and Rotterdam had independently submitted expenditure proposals, each of which would expand the polypropylene output of their respective plants by 7% or 17,500 tons per year.1 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. Thus, Fawn could not accept both projects; he could sponsor only one for approval by the board. Corporate policy was to evaluate projects 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. In addition, the board of directors was receptive to "strategic factors-considerations that might be difficult to quantify. The manager of the Rotterdam plant, Elizabeth Eustace, argued yocifer- gusly that her project easily surpassed all the relevant quantitative standards and that t had important strategic benefits. Indeed, Eustace had interjected those points in two recent meetings with senior management and at a cocktail reception for the board of directors. Fawn expected to review the proposal from Lucy Morris, manager of Merseyside Works, the Liverpool plant, at the meeting with Camperdown, but he sus- pected that neither proposal dominated the other on all four criteria. Fawn's choice would apparently not be straightforward. The Proposal from Merseyside, Liverpool The project for the Merseyside plant entailed enhancing the existing facilities and the prouction process. Based on the type of project and the engineering studies, the potential benefits of the project were quite certain. To date, Morris had limited her discussions about the project to conversations with Fawn and Camperdown. Camper- down had raised exploratory questions about the project and had presented prelimi- nary analyses to managers in marketing and transportation for their comments. The revised analysis emerging from those discussions would be the focus of Fawn's dis- cussion with Camperdown in the forthcoming meeting Camperdown had indicated that Morris's final memo on the project was only three pages long Fawn wondered whether this memo would satisfy his remaining questions. The Rotterdam Project
