Diamond Chemicals PLC (A)

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Case 20: Diamond Chemicals plc (A) --PT07 Group 10 INTRODUCTION: Diamond Chemicals is a large worldwide chemicals producer with two factories in Liverpool England and Rotterdam Holland. Both of their plants were built in 1967 with annual output of 250,000 metric tons polypropylene. Compare with low-cost producer, the production cost per ton is 1.09 which is a little bit high than competitors (see Exhibition 1). With the decline EPS from £60 in 1999 to £30 in 2000 and worldwide economic slowdown, the controller of plant manager of Merseyside (Liverpool), Frank Greystock, bring a improvement project in order to make plant more efficiency, more output and save more energy. Frank proposed an expenditure of £9 million to renovate and…show more content…
Maybe the industry may go up after several years (as marketing vice president said). At that time, the increase of output will benefit the company. Here we draft this project DCF with a conservative assumption to see whether this project is value to invest. The EPC project, originated by assistant plant manager, should be a separate project in the Merseyside's capital budgeting. Although the EPC production is a part of output from Merseyside plant, this project we are talking about is to renovate and rationalize the polypropylene production line. There is no dependency between them. We understand this EPC project might be very important for the company. But it is needed to propose another separate capital budgeting for approval. As Gowan said, "The Treasury staff thinks this impounds a long-term inflation expectation of 3 percent per year". To keep the gross margin, the company may need increase sales 3% per year. As we all known, in most cases, the cost of goods sold will increase accordingly with inflation. If the company continues keeping original sales, it means the revenue will decline. So in DCF table, we add 3% increase for both before and after Merseyside project. The impact items from the table are: new sales [_line 4 of exhibition 3_], old sales [_line 9 of exhibition 3_], and overhead [_line 23 of exhibition 3_]. Moreover, there is a potential risk that the plant will be closed for 45

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