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Victoria Chemicals PLC A The Merseyside Project Case Solution
| Solution Id | Length | Case Author | Case Publisher |
|---|---|---|---|
| 2478 | 1385 Words (6 Pages) | Robert F. Bruner | Darden School of Business : UVA-F-1543 |
A Word File
Victoria Chemicals PLC was having financial difficulties and was under pressure from its large owners since its EPS dropped from 250 to 180 pence in one subsequent year. In addition, Victoria Chemicals was still using its outdated manufacturing facility with low production efficiency, which they acquired in the late 1960s. Because of the lack of technology incorporated in the facility, the firm was having a rough time meeting the evolving and ever-changing demand of its customer, causing it to lose potential profits. The competitors of Victoria Chemicals were able to upgrade state-of-the-art facilities and equipment to their manufacturing process, which resulted in the loss of customer retention to Victoria Chemical. Facing this issue, the factory manager recommended a 12-million-pound project to expand the business's facilities to minimize overhead and labor costs while producing items at a reduced cost. The plant's management forecasted that the firm would have to incur fixed costs of twelve million dollars, and this project would halt the production process for forty-five days, incurring a considerable expense. She also stated that following the installation of the new plant or extension of the facility, the firm will have lower overheads and maintenance costs.
Following questions are answered in this case study solution:
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What changes, if any, should Lucy Morris ask Frank Greystock to make in his discounted cash flow (DCF) analysis? Why? What should Morris be prepared to say to the Transport Division, the director of sales, her assistant plant manager, and the analyst from the Treasury Staff?
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How attractive is the Merseyside Project? By what criteria?
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Should Morris continue to promote the project for funding? Justify your response by revising the analysis if necessary.
Case Study Questions Answers
1. What changes, if any, should Lucy Morris ask Frank Greystock to make in his discounted cash flow (DCF) analysis? Why? What should Morris be prepared to say to the Transport Division, the director of sales, her assistant plant manager, and the analyst from the Treasury Staff?
The rate of inflation was assumed to be 0% in the original research, which we feel is incorrect. For a more realistic DCF analysis, the rate of growing prices should be incorporated. According to a Treasury Department expert, long-term inflation should be around 3%. Also, the preliminary engineering cost was subtracted as an expense in the initial study, which we elected to omit because it was a sunk cost. We did not include the 2 million expense, which we consider should not be included in the Merseyside project. Thus, we kept the capital expenditure at 9 million pounds instead of 11 million pounds. There was no actual expense made on behalf of the transportation department; instead, it was only a foreshadowing of a future cost.
Transport Division: The $2 million purchase cost should not be included since the Transport Division should bear the expense because it is company policy that each division's expenditures be independent of one another. In addition, the Transport sector does not belong to the Intermediate Chemicals Group. Aside from that, the Transport Division and the Intermediate Chemicals Group each had their executive vice presidents, who were paid an annual incentive bonus depending on the divisions' success.
Director of Sales: There are demand issues for the excess supply generated, as stated by the Sales Department, but as Greystock pointed out, the corporation should not burden itself with additional costs for the cost-cutting program. Because the product, polypropylene, is marketed as a commodity, the cost decrease combined with greater throughput would steal market share from competitors rather than create a cannibalization effect. Although Merseyside may outperform Rotterdam, this should be interpreted as a signal to Rotterdam to adopt the same capital program to boost efficiency and throughput to maintain cost competitiveness.
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