1. Examine the 4 criteria used to evaluate the capital expenditure proposals: (1) new product or market, (2) product or market extension, (3) engineering efficiency, or (4) safety or environment. The Merseyside project would be in the engineering-efficiency category. Which criteria should be used, and which are not helpful? Explain your reasons. Morris was plant manager of Victoria Chemicals Merseyside Works in Liverpool, England. Her controller, Frank Greystock, was discussing a capital project that Morris wanted to propose to senior management. The project consisted of a GBP12 million expenditure to renovate and rationalize the polypropylene production line at the Merseyside plant in order to make up for deferred maintenance and to exploit opportunities to achieve increased production efficiency. Victoria Chemicals was under pressure from investors to improve its financial performance because of the accumulation of the firms common shares by a well-known corporate raider, Sir David Benjamin. Earnings had fallen to 180 pence per share at the end of 2007 from around 250 pence per share at the end of 2006. Morris thus believed that the time was ripe to obtain funding from corporate headquarters for a modernization program for the Merseyside Worksat least she had believed this until Greystock presented her with several questions that had only recently surfaced. Victoria Chemicals, a major competitor in the worldwide chemicals industry, was a leading producer of polypropylene, a polymer used in an extremely 1 2 Page 258 wide variety of products (ranging from medical products to packaging film, carpet fibers, and automobile components) and known for its strength and malleability. Polypropylene was essentially priced as a commodity. The production of polypropylene pellets at Merseyside Works began with propylene, a refined gas received in tank cars. Propylene was purchased from four refineries in England that produced it in the course of refining crude oil into gasoline. In the first stage of the production process, polymerization, the propylene gas was combined with a diluent (or solvent) in a large pressure vessel. In a catalytic reaction, the polypropylene precipitated to the bottom of the tank and was then concentrated in a centrifuge. The second stage of the production process compounded the basic polypropylene with stabilizers, modifiers, fillers, and pigments to achieve the desired attributes for a particular customer. The finished plastic was extruded into pellets for shipment to the customer. The Merseyside Works production process was old, semicontinuous at best, and, therefore, higher in labor content than its competitors newer plants. The Merseyside Works plant was constructed in 1967. Victoria Chemicals produced polypropylene at Merseyside Works and in Rotterdam, Holland. The two plants were of identical scale, age, and design. The managers of both plants reported to James Fawn, executive vice president and manager of the Intermediate Chemicals Group (ICG) of Victoria Chemicals. The company positioned itself as a supplier to customers in Europe and the Middle East. The strategic-analysis staff estimated that, in addition to numerous small producers, seven major competitors manufactured polypropylene in Victoria Chemicals market region. Their plants operated at various cost levels.