This Victoria Chemicals PLC (A): The Merseyside Project case study focuses on the project evaluation of a planned improvement of a polypropylene production plant.
Robert F. Bruner
Harvard Business Review (UV1192-PDF-ENG)
August 29, 2008
Case questions answered:
- 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?
- How attractive is the Merseyside project? By what criteria?
- Should Morris continue to promote the project for funding? Justify your response by revising the analysis if necessary.
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Case answers for Victoria Chemicals PLC (A): The Merseyside Project
This case solution includes an Excel file with calculations.
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?
I made a few changes to the DCF analysis. I will post a screenshot of my spreadsheet below. The orange amounts are the amounts I changed.
I began by taking away the preliminary Engineering Costs because that amount has been spent over the preceding nine months. This tells me the cost is a sunk cost and should not be included in the analysis.
Next, I decided to take note of what the Treasurer had stated. Rather than changing the discount rate to 7%, I actually changed the inflation rate from 0% to 3% to account for the long-term inflation the treasurer was talking about.
As for the transportation division, I felt the tank car purchases needed to be taken into consideration just as the transportation division suggested. To do this, I added a capital expenditure cost of -2 to the year 2010.
The 2 million also needed to be depreciated over 10 years. I straight-line depreciated this cost from 2011-2020. I also decided that depreciation of the initial 12 million dollar investment should be straight-line depreciated because on page 76 of our books, it states that “accelerated depreciation generally improves the NPV of a capital project compared to straight-line depreciation.”
For this project, I didn’t want the NPV to be improved simply because of the tax benefits from using double-declining balance depreciation.
For the Sales and Marketing department, I felt that the recession would show…