Diamond Chemicals

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ADVANCED FINANcial Management | Diamond Chemicals PLC | Matt Cappbell | | | Cases A and B | Assumptions: * Tank car cost = sunk cost * Discount rate is used in nominal terms using inflation * Forecasted cash flows are adjusted for inflation * Merseyside and Rotterdam projects are mutually exclusive events * The acceptance of one project cannibalizes output at the other work site * We used worst case scenarios for all project comparisons * No capital rationing * Based our decision between Merseyside and Rotterdam on NPV maximization * For inflation sensitivity we altered the rates by 1% * Used discounted payback period Executive Summary: Part A After reviewing Frank…show more content…
That being said, we would agree with the Treasury Staff to realize inflation, but with a different method. Overall, we have decided that the Merseyside project should be accepted based on the achievement of Diamond Chemicals decision criteria. The project produces a positive NPV of €6.07, holds an IRR greater than their cost of capital at 21.4%, has a payback period less than 6 years at 5.71 years, and adds to earnings per share by generating an extra £.0203 per share. This project satisfies all 4 decision criteria requirements, making Morris’s choice easy in deciding to continue funding the project. Lucy Morris and Diamond Chemicals should go forward with the Merseyside project. Executive Summary: Part B The two projects, Merseyside and Rotterdam, are mutually exclusive because accepting one project will result in a higher level of output at that plant, but will incur a loss at the other plant. By accepting both projects the company, Diamond Chemicals, would achieve a 14% increase in output. However, based on forecasted demand by strategic analysts, the 14% increase does not make sense, but an increase of 7% does. Therefore both these projects seem to be mutually exclusive because each would attain the 7% increase. Taking into account the investment criteria imposed on Diamond Chemicals, and calculations found in the attached excel sheets, the two projects really aren’t that different. Accounting for inflation in both the Rotterdam and

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