FINC421 – Case Study in Corporate Finance Case Report Diamond Chemicals plc. : The Merseyside Project Introduction The goal of this report is to analyze and evaluate the capital budgeting decision of Ms. Morris and suggestion to the senior management of Diamond Chemicals PLC if sufficient capital should be allocated for the proposed £12 million expenditure to modernize and rationalize the polypropylene production line at the Merseyside Plant. The project has been proposed to improve the product output of Diamond Chemicals’ Merseyside factory. However, recently, different departments have mentioned problems such as capital expenditure, marketing cannibalization, discount rate etc. …show more content…
Even capital-expenditure can provide lots of benefit to the company, but it will also lead to a great loss to the company if there is a miss forecasting of the proposal. To avoid unnecessary risk of causing the failure of the proposal, company will evaluate the capital-expenditure proposal with a complicated scheme to ensure the risk is reduce to the lowest level. Changes in DCF Transport Division It is a good idea to purchase trucks. Greystock disagree with that cause by his misunderstanding. When we try to reflect this in to the discount cash flow, it has an obliviously decrease in payback period. And the NPV, IRR have an increasing too. It must be benefit for our project. Director of Sales Our target wants to maximize the profit of the company. We should find a way to sell out all the products. It is sad to us if we must cut the extra production. According to our testing, maximum cannibalization will make the NPV, IRR and EPS decrease nearly half of current expectation. We don’t want to see that. Assistant plant manager We agree it may be a good choice in the long term (more than 20 years). But, we are doing the 15 years forecasting now. And it will be more difficult to predict the longer future. Therefore, we can’t see the benefits of your suggestion. However, we will put this as our backup choice. Analyst from the treasury staff Andrew Gowan has done a good
This report will provide insight on what your management team should do concerning production costs. We will examine 2 different scenarios and provide our decision as to which makes most sense. In the first scenario, the total fixed cost of the production is 1,000,000. In the second
This mini-case provides a review of the methodology and rationale associated with the various capital budgeting evaluation methods such as payback period, discounted payback period, NPV, IRR, MIRR,
This decision may be the result of a conservative policy pursued by a firm. Restriction may be imposed on divisional heads on the total amount that they can commit on new projects.Another internal restriction for capital budgeting decision may be imposed by a firm based on the need to generate a minimum rate of return. Under this criterion only projects capable of generating the management’s expectation on the rate of return will be cleared.
In the case of Mendel Paper Company which produces four basic paper products lines at one of its plants: computer paper, napkins, place mats, and poster board. Although the plant superintendent, Marlene Herbert is pleases with increased sales he is also concerned about the costs. The superintendent is concerned with the high fixed cost of production, the increases in fixed overhead and even variable overhead. He feels that the production of place mat should be discontinued. His reason for the discontinuation is that the special printing is driving up the variable overhead to the point where the company may not find it profitable to continue with the line. After reviewing the future predictions of the
The capital budgeting analysis reflects the assumptions stated in the case scenario that the initial
The upgrade of the Rotterdam plant involves implementing the Japanese technology and requires a capital expenditure of £8.0 million with £3.5 million spent today, £2.0 million on year one, £1.0 million on year two and £1.0 million on year three. This will also increase polypropylene output by 7% from current levels at a rate of 2.0% per year. In addition, gross margin will improve by 0.8% per year from 11.5% to 16.0%. After auditing the financial models, it is concluded that the static net present value of the upgrade is -£6.35 million using a discount rate of 10% and an expected inflation rate of 3% annually. The Rotterdam upgrade contains an option to switch to the speculated German technology being available in five years. The current value of the option is zero as it is deeply out-of-the-money. The total net present value of the upgrade is -£6.35 million. The incremental earnings per share of the upgrade is £ 0.0013, the payback period is 14.13 years, and the internal rate of return is 18.7%.
1. What is the competitive situation faced by Wilkerson? The critical product in term of market competition is the pumps of Wilkerson Company. The pumps are Wilkersons major product line with a production of about 12,500 units per month. Pumps currently have the lowest gross margin among all products, because competitors had been reducing prices on pumps and Wilkerson adopted its prices in order to remain competitive and to maintain the volume. 2. Given some apparent problems with Wilkersons cost system, should executives abandon overhead assignment to products entirely by adopting a contribution margin approach in which manufacturing overhead is treated as a period expense? Our conclusion is, that they should not adopt
Virtually all general managers face capital-budgeting decisions in the course of their careers. Among the most common of these is the either/or choice about a capital investment. The following describes some general guidelines to orient the decision-maker in these situations.
After closely reviewing the financial and production data, our accounting team has found that your traditional cost allocation is faulty and misleading. The costs of products A and C were over allocated and products B and D were under allocated causing deceptive information on the true profits of the company. Also, product B appears to be
That being said, we would agree with the Treasury Staff to realize inflation, but with a different method.
|250000 indirect employees & 9000 vehicle for distribution). |position in profitability due to drop in prices by nearly 30% since 1950’s. |
This paper will seek to analyze the financial statements of the O.M Scott & Sons Company during the years 1957-1961, in order to provide readers with a thorough understanding of the various factors that may influence the future success of this business. Additionally, recommendations based on an analysis of their financial
Victoria Chemicals’ Intermediate Chemicals Group (ICG) is evaluating two mutually exclusive proposals on their capital expenditures. The Liverpool and Rotterdam plants have compiled separate proposals. Each proposal had the potential to increase the polypropylene output by 7 percent for their plant respectively. Victoria Chemicals could not view a 14 percent increase companywide being feasible, but agreed half of it would. The board would approve only one of the projects. James Fawn must support one proposal and then submit it to the board for consent.
Treasury Staff: Explain to the treasury staff that 10% discount rate is a fair number to use because it is mentioned in the capital budgeting manual. When addressing the treasury staff, talk about what was meant by the comment and understand why they want to use 7% for the rate of return.
We decided to tighten accounts receivable and drop poorly selling products because they yielded a percentage decrease in working capital requirement larger than their percentage drop in sales. Also these 2 options fit