preview

Collinsville Case Study Essay

Decent Essays

Collinsville case study
1. Which firms are the “identical twins” of the Collinsville investment? Using the β’s for those assets and the methodology learned in this course, determines the appropriate discount rate for the Collinsville investment.

We are interested in obtaining the asset beta for Collinsville investment. Here from the reading material, we find there were altogether 6 chemical companies that produce sodium chlorates. They are Hooker, Pennwalt, American, Kerr-McGee, Brunswick and Southern. However, since we are evaluating the addition of a sodium chlorate plant, the two firms (Brunswick and Southern) who specialize in producing sodium chlorate are likely the best “twins”. To determine the asset betas of each company, we …show more content…

Here, in the given pro forma in Exhibit 8, the cost of salt and other in 1984 was 1836 while that in 1983 is 1956. Thus, the growth rate is (1956-1836)/1836=6.6%.

Thirdly, since the total fixed costs account for 14.1% of its sales in the year of 1983 and 1984, we assume the total fixed costs will remain at this level until 1989. Similarly, the account receivable, account payable, and inventories stays at 10%, 5.5% and 4.5% of sales respectively.

For the depreciation part, we adopted the straight-line method. Here since the depreciation of year 1984 was $1270, we just assumed all the depreciation amount to be equal to $1270 till the year 1989. With all of these previous assumptions, we obtain the complete pro forma financial statement and the cash flow table for the Collinsville Plant.

Together with the discount rate we calculated from the first part, we get the NPV of this project is $8737.6. Under this valuation, the $12M offer is high and that Dixon should not make the investment without the laminate technology.

3.

Calculate the incremental NPV from adding the laminate technology to the Collinsville plant. What is the NPV of the Collinsville plant with the laminate technology?

When we consider the laminate technology, we have to add $2.25M to the CAPX for first year and add $225,000 to depreciation per annum from the second year to the last year. Moreover, we assume the

Get Access