There are also a number of conflicts of interest and other ethical dilemmas that arise in the case which need to be addressed in the assessment of the project. Again, the text does not highlight this issue, but sharp students will raise it. This question raises the issue of extraneous cash flows. These rolling stock could not be used outside Britain because of differences in track gauge and hence Rotterdam plant needs to arrange their raw material carriage themselves. Earnings had fallen to 180 pence per share 2007 from 250 pence per share 2006. Can we deal with that analytically and, if so, what is its effect on the value of the Merseyside project? This instance might profit from decomposing the bundle and valuing the two pieces at their respective appropriate risk-adjusted discount rates. Background of the Study For having sufficient amount of capital, cash is the most important source of every aspect of investment.
The internal rate of return when there is no charge for erosion is higher compared to full erosion. New stock would have depreciable life of 10 years. Victoria Chemicals had an option to purchase the pipeline which right-of-way is 3,5 million pounds. If the net present value is equal to or greater than zero, then the investment is termed profitable and is accepted. Changes in inventory: Students often neglect to reflect in their expenditure analyses the changes in working capital resulting from a project. Some students will suggest that Merseyside retain two call options, one on each technology—but this overstates the option value at Merseyside, since one would logically not exercise both call options. Cannibalization The cash flow falls in 0.
Both plants were identical to each other and produced an equal amount of goods. Abdullah Saleh 0730072 Instructor: Dr. Why did the assistant plant manager offer his suggested change? Once we took into account cannibalization, we needed to reduce the work in Victoria L. Victoria Chemicals started up in 1967 when they built two plants, one in Merseyside, England and one in Rotterdam, Holland. It would also bring savings in cost and other efficiencies as lower energy requirement energy savings assumed to be 1. Macro Lack of coordination within the companies… 1825 Words 8 Pages I. Inflationary Factor As we made calculations on the assumptions of the inflation factor and the given rate of inflation rate, which is 3%, therefore we have the facts and figures that suggest that the net present value of the project after its completion of 15 years useful life is 90 million, which was discounted at a rate of 10%.
Additionally, the treatment of engineering costs is incorrect. Corporate manual also stipulated that overhead costs to be reflected in project analysis is at the rate of 3. Namely; sunk costs, cannibalization, cash flows from unrelated projects and implication of future Capex programs for the transport division into the Merseyside project. What might account for the differences in rankings? This situation will only be temporary. Sunk Cost Preliminary Engineering cost of 0. Moreover, the of return indicates that the rate of 24% after its useful life of 15 years is a good return while all the concerns regarding the required rate of return have been fulfilled.
Now we will correct this different issues. The above valuation methods, however, have some advantages and disadvantages as will be seen later in this paper. The main objectives of this case are in descending order : 1 to explore the problem of resource allocation within corporations; 2 to illustrate and assess the impact of capital rationing on capital-investment decisions; 3 to exercise and interpret the implications of classic tools of investment analysis e. The manager of the plant assumed that the company will face of 12 million and the facility will have to be shut down for 45 days, which would have a significant cost. To improve the performance of the business as well as to introduce new business opportunity in the organization cash is very important.
Some students will resist the notion that Rotterdam would ever be re-engineered to the German technology, as suggested by the statements in the B case. . Which project should Fawn approve? However, the B case highlights options associated with technological change that may help us differentiate between the two. The Japanese technology option is probably in-the-money. There are four procedures used to evaluate the best outcome of projects i. The project of Merseyside consists of updating the existing facilities and the polypropylene production process.
For this project, line would need to be shut down for 45 days, however, because Rotterdam plant was operating near capacity, Merseyside customers would buy from competitors. Second option that was placed by Eustace was that the company cannot be successful without acquiring new technology which would be operated by the analog which would be headed by the advance programming that will be looked after the team of professional software professor from Japan, the installation of new system will not be adequate without the proper supply of propylene gas which would be obtained five kilometers away which could be extended to Rotterdam plant and refinery situated at the other end. Their intuition is not unreasonable. Inventory adjustments must also reflect the reduced working capital requirement at Rotterdam brought about by cannibalization. Apparently, Diamond Chemicals can use 7% more capacity in polypropylene production, but not 14% more. The purpose here is to focus on the crossover problem and its cause, which is the massive differences in the time profiles of cash flow.
Hence, the discount rate used should be adjusted for inflation, which is 3%. Call option on the Japanese technology 2. Project description: You are required to analyze the financial statements of a company and compare it to its peers. Payback: The classic flaws of payback are that it ignores the time value of money and ignores cash flows occurring after the payback horizon. Instead, Merseyside really contains the option to call on one of the new technologies, and then to switch to the other. Production process: The production of polypropylene began with propylene, a refined gas received in tank cars from four refineries produced in refining crude oil into gasoline.