Preview

Diamond Chemicals Case Study

Good Essays
Open Document
Open Document
2919 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Diamond Chemicals Case Study
Diamond Chemicals: Case 21-22

TO: Lucy Morris
FROM:
DATE: September 30, 2009
SUBJECT: Merseyside Project

In this memo I will be making a recommendation for or against the Merseyside Project. With the help of a few questions that guide my memo, I will be able to determine whether or not to continue funding for the Merseyside Project. This memo will include an exhibit that will show an analysis of the Merseyside Project including the NPV and the IRR. In the DCF analysis that was provided in the case I have made a few changes to it and that will be presented later in my memo. First I will like to talk about how Diamond Chemicals evaluate its capital expenditure proposals. Before submitting a project for approval, the leader of the project must determine what category the project falls in. They have four possibilities and they are (1) new product or market, (2) product or market extension, (3) engineering efficiency, and (4) safety or environment. The Merseyside Project fell under category 3 which was engineering efficiency. With this project comes some concerns and that is why evaluating capital expenditure proposals can become such a complicated scheme. With Merseyside categorized as an engineering efficiency, it needs to meet a few requirements.
• Impact on Earnings per Share: This number must be a positive for all engineering efficiency projects. This number “calculates the average EPS contribution of the project over its entire economic life. “(Bruner,284) In Greystock’s analysis it was positive and the number was at 0.018.
• Payback: The maximum payback period for engineering efficiency projects stands at 6 years. Along with the Impact of Earnings per Share meeting the criteria, the payback period also does. Greystock’s analysis has the payback period at 3.6 years.
• Discounted Cash Flow: To determine this number you use the Present Value of the Future Cash flows. Once you determine those numbers you add them to determine the NPV of

You May Also Find These Documents Helpful

  • Good Essays

    Lockheed Hbr Case

    • 2679 Words
    • 11 Pages

    NPV = Difference between the present value of cash inflows and the present value of cash outflows.…

    • 2679 Words
    • 11 Pages
    Good Essays
  • Powerful Essays

    The resulting NPV indicates that the project should be accepted and the investor should expect a return on equity of 38.87%. The NPV provides the investor with an expectation of what all future cash inflows will be worth in today’s dollars. The profitability index is closely related to the NPV. It evaluates the project’s feasibility based on future cash flows compared to initial costs. In general, a project is deemed a valid investment if this ratio is over 1. For this investment opportunity the profitability index indicates that it should be accepted.…

    • 3248 Words
    • 13 Pages
    Powerful Essays
  • Satisfactory Essays

    BGA1 Task 4

    • 343 Words
    • 2 Pages

    Net present value (NPV) method is used to decide whether or not a company should take on a new project or acquisition. The formula for NPV is the difference between the present value of a project’s cash inflows and its cash outflows. To calculate the present values the future cash flows are discounted using the time value of money method. For the project to be accepted the NPV should be positive, because it means the return is greater than the required rate of return; or zero, because that means the return is equal to the required rate of return. However, if negative the project should be rejected, because its return is less than the required rate of return. This required rate of return is also referred to as the cost of capital.…

    • 343 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    Nt1330 Unit 4

    • 4542 Words
    • 19 Pages

    The first project is a process optimization which would result in a cost reduction of $120,000 per year. This benefit would be achieved immediately after the end of the project.…

    • 4542 Words
    • 19 Pages
    Good Essays
  • Good Essays

    BIS 375 Final Exam

    • 612 Words
    • 5 Pages

    In evaluating EC projects, it is always necessary to complete a cost-benefit analysis, even when the cost of the project is small and the value to the organizati...…

    • 612 Words
    • 5 Pages
    Good Essays
  • Better Essays

    Murphy, K.E., Simon, S.J. (2002), "Intangible benefits valuation in ERP projects", Information Systems Journal, Vol. 12 No.4, pp.301-20.…

    • 1050 Words
    • 5 Pages
    Better Essays
  • Powerful Essays

    Ah531

    • 3543 Words
    • 15 Pages

    Valle, J., & Soares, C. (2005). The use of earned value analysis(eva) in the cost management of construction projects. Federal university fluminense, brazil, Retrieved from http://www.google.com/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=4&ved=0CEQQFjAD&url=http://www.icoste.org/ICMJ%20Papers/Valle%20-%20EVA.pdf&ei=PkW7UeT0BobY8gS18YCADg&usg=AFQjCNFSA-RUj35ZNIwD-ii15E76nCs9-Q&sig2=Sktqkw1XxvD8CRFJnvkbVg…

    • 3543 Words
    • 15 Pages
    Powerful Essays
  • Good Essays

    5. Resource Allocation – how much fund should be allocated to these project if pursued : coal flyash bricks, Northvale Site, Developing a Corporate Social Responsibility / Sustainability Reporting, Buxton upgrade for the kiln.…

    • 536 Words
    • 3 Pages
    Good Essays
  • Satisfactory Essays

    Essay for applic

    • 736 Words
    • 3 Pages

    1. NPV (Net present value) is a tool of analyzing the profitability of the investment. Calculating NPV can be made in Excel NPV function by subtracting old equipment costs from new equipment costs, and then we have the result of peso cash flow rate. Then depreciation costs and tax of 35 % will be subtracted from incremental total costs and then depreciation will be added again.…

    • 736 Words
    • 3 Pages
    Satisfactory Essays
  • Better Essays

    Diamonds are seen everywhere in stores and they are displayed in necklaces, earrings, pins and rings. They sparkle brilliantly in the right light. More than likely, most people don’t know how that diamond made it to the store. That diamond will be bought and worn by the lucky recipient. They don’t realize that sparkling diamond or “stone” has gone through extreme heat and pressure, as well as survived a violent ride to the earth’s surface.…

    • 2118 Words
    • 9 Pages
    Better Essays
  • Good Essays

    The Mobot Project

    • 599 Words
    • 3 Pages

    And after some deep thought, we all agreed that the mechanical way would be the…

    • 599 Words
    • 3 Pages
    Good Essays
  • Good Essays

    Growth in EPS. Calculated as the average annual EPS contribution of the project over its entire economic life (15 years), the average annual addition to EPS of Merseyside and Rotterdam projects are GBP0.022 and GBP0.030 respectively, with a difference of GBP0.008.…

    • 812 Words
    • 3 Pages
    Good Essays
  • Powerful Essays

    Blood Diamonds

    • 3425 Words
    • 14 Pages

    Bibliography: Campbell, Greg. Blood Diamonds: Tracing the Deadly Path of the World’s Most Precious Stones. New York: Westview Press, 2003.…

    • 3425 Words
    • 14 Pages
    Powerful Essays
  • Better Essays

    Victoria Chemicals

    • 788 Words
    • 4 Pages

    (1) Impact on earnings per share evaluates how the project is going to affect shareholders’ wealth of the company.…

    • 788 Words
    • 4 Pages
    Better Essays
  • Satisfactory Essays

    Diamond Chemicals Plc(a)

    • 3914 Words
    • 16 Pages

    DIAMOND CHEMICALS PLC (A): THE MERSEYSIDE PROJECT Late one afternoon in January 2001, Frank Greystock told Lucy Morris, “No one seems satisfied with the analysis so far, but the suggested changes could kill the project. If solid projects like this can’t swim past the corporate piranhas, the company will never modernize.” Morris was plant manager of Diamond Chemicals’ Merseyside Works in Liverpool, England. Her controller, Frank Greystock, was discussing a capital project that Morris wanted to propose to senior management. The project consisted of a (British pounds) £9-million expenditure to renovate and rationalize the polypropylene production line at the Merseyside plant in order to make up for deferred maintenance and to exploit opportunities to achieve increased production efficiency. Diamond Chemicals was under pressure from investors to improve its financial performance because of both the worldwide economic slowdown and the accumulation of the firm’s common shares by a well-known corporate raider, Sir David Benjamin. Earnings per share had fallen to £30.00 at the end of 2000 from around £60.00 at the end of 1999. Morris thus believed that the time was ripe to obtain funding from corporate headquarters for a modernization program for the Merseyside Works—at least she had believed so until Greystock presented her with several questions that had only recently surfaced.…

    • 3914 Words
    • 16 Pages
    Satisfactory Essays