American Chemical Corporation Case Summary

This view implies that a single hurdle rate may deprive an under profitable division of investments in order to channel more funds into a more profitable division. While this is sound logic, certain situation exist where projects will go unfunded that do create value to the company.

If the IRR exceeds the required rate of return (10%), the project should be accepted. Otherwise, it should be rejected.

Currently, Starbucks is considering making an investment in a new manufacturing plant in Augusta, GA. The capital budgeting project requires an initial investment outlay of $ 40 million and is expected to general annual cash flows of 5.200.000, 6.500.000, 8.200.000, 8.700.000, 9.000.000, 9.550.000, and 11.500.000 for years 1 to 7, respectively. Starbucks estimates that the project has a below-average risk and sets the discount rate at 8.06 % -- based on the company’s Weighted Average Cost Of Capital (WACC). The discount rate is effectively the desired return on an investment an

We should Exhibit 6 with Exhibit 7, beacuse the last one considers an inflation of 11%; also Exhibit 8 can help us to obtain the Rm and Rf.

American Chemical, a diverse chemical company in the late1970s, wanted to acquire, through a share buyout, Universal Paper Corporation.  Universal sued them on the stance that it would violate an antitrust law, because its sodium-chlorate production division would digest Universal’s large division creating a lack of competition in the Southeast United States.  To alleviate this, American Chemical divested that division in a plant they had in Collinsville Alabama, subsequently looking for a buyer, once they were able to acquire 91% of Universal. Dixon, another chemical company

1. Discount rate: The analysis assumes that the discount rate is the same for the complete throughput time of the project. This can be countered by using different discount rates for different years, in case required.

A project may have more than one IRR, especially when returns of an investment yield negative cash flows following positive cash flows.

Hewsen Chemical Inc. is a small, privately-held producer of specialty chemicals used in testing labs and other manufacturing firms. Mary Benninger got a position as controller and office manager at Hewsen Chemical. After working for few years, Mary started to notice some unethical behavior of her supervisors. Mary seeks advice of her old friend Tom Chu on how she should react to the unethical things taking place inside the firm. Mary and Tom both graduated from Mackenzie King University and were CMA colleagues. She told Tom how Hewsen Chemical Company was now down 30 percent and their newest plant which was built three years ago, called Brampton was only operating at 50 percent capacity. Furthermore, Mary explained that Hewsen’s expenditures were economically unstable because sales started to become more important than costs.

c. Is your estimate of Lex’s cost of equity appropriate as a discount rate for Lex’s total operating cash flows? Why or why not?

In the case of Worldwide Paper Company we performed calculations to decide whether they should accept a new project or not. We calculated their net income and their cash flows for this project (See Table 1.6 and 1.5). We computed WPC’s weighted average cost of capital as 9.87%. We then used the cash flows to calculate the company’s NPV. We first calculated the NPV by using the 15% discount rate; by using that number we calculated a negative NPV of $2,162,760. We determined that the discount rate of 15% was out dated and insufficient. To calculate a more accurate NPV for the project, we decided to use the rate of 9.87% that we computed. Using this number we got the NPV of $577,069. With the NPV of $577,069 our conclusion is to accept this

A target payback period will be set by the company and the proposals that recover their initial cost within this time will be acceptable. If a comparison is made between two or more options then the choice will be project with the fastest payback.

In 2001, the Tulsa, Oklahoma, Williams Company was in financial distress. The primarily energy-industry company was struggling with a shrinking energy trading market, which was marked by distressed entities such as Enron’s broadband unit and Global Crossing. Williams also suffered internally with a floundering telecommunications division and a plummeting stock price. These issues led credit rating agencies Moody’s and

The discount rate is a means of calculating a value now of benefits that occur in the future. The discount rate recognizes the time value of money. A four percent real discount rate is used in the calculations. However, the high-speed train project would be economically feasible even under the higher discount rates used by some public agencies and economists. The Internal Rate of Return (IRR) is an evaluation measure that is

Therefore, projects with expected return below 7.02% should be rejected if we only recommend a single and solitary hurdle rate. If doing so, we would ignore the difference between business line and probably accept projects with too higher risk relative to its comparable or reject projects with appropriate risk in its business.

AMC was forced to issue a tender to sell a Sodium Chlorate plant, near Collinsville, Alabama.