Victoria Chemicals: Case study
Victoria Chemicals: Case study
Introduction
Victoria Chemicals is a major competitor in the worldwide chemical industry. They are a leading producer of polypropylene, which is a polymer used in products such as medical products and automobile components. Victoria Chemicals started up in 1967 when they built two plants, one in Merseyside, England and one in Rotterdam, Holland. Both plants were identical to each other and produced an equal amount of goods. In 2008 these two plants have an old-fashioned production process of polypropylene and the production costs are some of the highest in the industry. The plants need to be renovated and rationalized. Victoria Chemicals was also under pressure from investors to improve their financial performance as the earnings per share had fallen from 250 pence in 2006 to 180 pence in 2007. Both the plant managers have made suggestions on how to improve the production in their plant. Investments will be made only in one of the plants. Summaries of the suggestions have been produced as the discounted-cash-flow (DCF). These two projects have been analysed from an external perspective.
Problem statement
Should Victoria Chemicals make an investment into the renovation of the production line in the Merseyside or in the Rotterdam plant? Discussion and analysis is based on the following main items:
A comparison of the two different investment plans and a critical assessment of included cash flows
Nominal rate and real interest rate
The treatment of conflicts of interest and other ethical dilemmas that may arise in the investment decision
The crossover problem
Investment criteria’s at Victoria Chemicals
Sensitivity analysis and critical values
Method
By discussing the different posts and figures in the investment plans we have formed a report taking in consideration the different aspects of the two projects. A file in Excel was created to be able to change numbers and do new calculations to find out how NPV
Introduction
Victoria Chemicals is a major competitor in the worldwide chemical industry. They are a leading producer of polypropylene, which is a polymer used in products such as medical products and automobile components. Victoria Chemicals started up in 1967 when they built two plants, one in Merseyside, England and one in Rotterdam, Holland. Both plants were identical to each other and produced an equal amount of goods. In 2008 these two plants have an old-fashioned production process of polypropylene and the production costs are some of the highest in the industry. The plants need to be renovated and rationalized. Victoria Chemicals was also under pressure from investors to improve their financial performance as the earnings per share had fallen from 250 pence in 2006 to 180 pence in 2007. Both the plant managers have made suggestions on how to improve the production in their plant. Investments will be made only in one of the plants. Summaries of the suggestions have been produced as the discounted-cash-flow (DCF). These two projects have been analysed from an external perspective.
Problem statement
Should Victoria Chemicals make an investment into the renovation of the production line in the Merseyside or in the Rotterdam plant? Discussion and analysis is based on the following main items:
A comparison of the two different investment plans and a critical assessment of included cash flows
Nominal rate and real interest rate
The treatment of conflicts of interest and other ethical dilemmas that may arise in the investment decision
The crossover problem
Investment criteria’s at Victoria Chemicals
Sensitivity analysis and critical values
Method
By discussing the different posts and figures in the investment plans we have formed a report taking in consideration the different aspects of the two projects. A file in Excel was created to be able to change numbers and do new calculations to find out how NPV