Victoria Chemical

Topic Victoria Chemical

Changes to Original Merseyside DCF • Inflation is 3% • Add 3 lines for Cannibalization o Lost Rotterdam Output o Lost Rotterdam Revenue o Lost Rotterdam Gross Profits • Adjust Incremental Profits (New Gross Profits – Old Gross Profits – Lost Rotterdam Gross Profits) • Add line for WIP Inventory (Lost Rotterdam WIP Inventory) • Adjust Incremental WIP Inventory (New WIP – Old WIP – Lost Rotterdam WIP) • Add 2 lines for Depreciation o New Depreciation, Tank o Old Depreciation, Tank • Adjust Incremental Depreciation (New Depreciation Plant + (New Depreciation Tank – Old Depreciation Tank)) • Remove Overhead • Remove Preliminary Engineering Costs

• Adjust Pretax Incremental Profits (Incremental Gross Profits – Incremental Depreciation) • For Capital Expenditures record tank car expense in 2010, and recoup the expenditure in 2012 • For Add Back Depreciation add back the Incremental Depreciation • For Less Added WIP Inventory make sure to recoup the full amount spent on WIP Inventory (Sum of 2008 to 2021) in 2022 Changes to Rotterdam DCF • Inflation is 3% • Remove 3.5 million Outlay in 2007 • Remove 40 million Terminal Value Merseyside (Technology Option) DCF • Inflation is 3% • New Output and Old Output are identical (267,500) • New Gross Profits starts at 12.5% in 2010 and increase by 0.5% each year until it reaches 15%, where it remains constant thereafter • Old Sales will not take into account Lost Output Due to Construction • Depreciation o Year 1 Outlays Depreciation begins 2010 [VDM(5, 0, 15, E21-1, E21)] o Year 2 Outlays Depreciation begins 2011 [VDM(1, 0, 14, E21-1, E21)] o Year 3 Outlays Depreciation begins 2012 [VDM(1, 0, 13, E21-1, E21)] • Annual Cost of Gas Contract 0.4 million • No Overhead • Pretax Incremental Profits (Incremental Gross Profits – Total Depreciation – Annual Cost of Gas Contract) • Tax Expense (Pretax Incremental Profits * 30%) • For Less Added WIP Inventory make sure to recoup the full amount spent on WIP Inventory (Sum of 2010 to 2023) in 2024 • Capital Spending (Investment Outlays *(1 + Inflation)^2) For the Case Write-up Itself •

Your protagonist should be either Lucy Morris or James Fawn. Your audience is the Corporate Executives, who have to consider both the Merseyside and the Rotterdam projects. However, your audience for the DCFs (only) should be the investors of Victoria Chemical. • Remember to address the three questions from the Case A: o 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? o How attractive is the Merseyside project? By what criteria? o Should Morris continue to promote the project for funding? • Remember you need to address the concepts of Incrementality and Marginality. • Be sure to address the following questions from Case B: o How do the two projects (Merseyside and Rotterdam) compare on the basis of Victoria Chemicals’ investment criteria? o Is it possible to quantify the value of potentially adding the Japanese technology to the Merseyside project? If so, how? o Which project (Merseyside or Rotterdam) is superior? • Finally, remember that you need NPVs and IRRs for the Original (Modified) Merseyside DCF, the Rotterdam DCF (cannibalization), and the Merseyside Technology Option DCF. Executive summary in the first page of the case. I will provide a copy of the case and the excel sheet. It should be 3 exhibits in this case

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