VICTORIA CHEMICALS PLC THE MERSEYSIDE AND ROTTERDAM PPROJECTS
VICTORIA CHEMICALS PLC
THE MERSEYSIDE AND ROTTERDAM PPROJECTS
I would choose Merseyside project rather than Rotterdam’s not only for its superior prospect based on the quantitative criteria, but also for a more rational strategy consideration.
For the four investment criteria, here’s the elaboration.
NPV. Since the two plants are of identical scale, age, design and similar project size, it makes sense to use NPV to compare the two projects. Not taken into account the erosion at Merseyside, the projected NPV of Rotterdam project is GBP4.49 million (GBP15.06 million- GBP10.57 million) higher than that of Merseyside project.
IRR. The IRR of the Merseyside project (24.3%) is 5 percentage points higher than that of Rotterdam project (17.3%).
Payback. Based on the cumulative free cash flow calculated, the payback period of Merseyside (3.8 years) is four years less than that of the Rotterdam projects (7.9 years), which is a big difference for a 15-year project.
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.
A quick look at the four quantitative criteria might suggest that the two projects are of similar value to Victoria Chemicals; NPV and Growth in EPS are in favor of Rotterdam while IRR and Payback are in favor of Merseyside. However, taken into consideration the current status of the industry, the four criteria should not be of the same weight. As suggested by the director of sales, the industry is in a downturn with a possible oversupply issue around the corner. A price competition can be foreseen among the top suppliers of polypropylene in Europe, which would require a more liquid financial status of the company. A 7.9-year payback suggested by Rotterdam project might put the company into a dangerous financial situation among fierce
THE MERSEYSIDE AND ROTTERDAM PPROJECTS
I would choose Merseyside project rather than Rotterdam’s not only for its superior prospect based on the quantitative criteria, but also for a more rational strategy consideration.
For the four investment criteria, here’s the elaboration.
NPV. Since the two plants are of identical scale, age, design and similar project size, it makes sense to use NPV to compare the two projects. Not taken into account the erosion at Merseyside, the projected NPV of Rotterdam project is GBP4.49 million (GBP15.06 million- GBP10.57 million) higher than that of Merseyside project.
IRR. The IRR of the Merseyside project (24.3%) is 5 percentage points higher than that of Rotterdam project (17.3%).
Payback. Based on the cumulative free cash flow calculated, the payback period of Merseyside (3.8 years) is four years less than that of the Rotterdam projects (7.9 years), which is a big difference for a 15-year project.
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.
A quick look at the four quantitative criteria might suggest that the two projects are of similar value to Victoria Chemicals; NPV and Growth in EPS are in favor of Rotterdam while IRR and Payback are in favor of Merseyside. However, taken into consideration the current status of the industry, the four criteria should not be of the same weight. As suggested by the director of sales, the industry is in a downturn with a possible oversupply issue around the corner. A price competition can be foreseen among the top suppliers of polypropylene in Europe, which would require a more liquid financial status of the company. A 7.9-year payback suggested by Rotterdam project might put the company into a dangerous financial situation among fierce