Investment Case Study

2532 Words Jul 1st, 2011 11 Pages
Do the circumstances surrounding the sale of the Collinsville plant play any role in your willingness to buy the assets? If so, how, if not, why not?

On the one hand, the circumstances of the sale make me less willing to buy. In particular, both Universal and the federal government think that American’s acquisition creates antitrust issues. If this is the case, American could use its market power to change the nature of the market and make Dixon’s new plant unprofitable by setting lower prices for sodium chlorate in its other plants. On the other hand, the circumstances make me more willing to buy the assets because American has to divest the plant to comply with a court order. Therefore, they have less leverage during the sale
…show more content…
With these assumptions, the present value of the total cash flows value the plant at $7.9M.[5] Under this valuation, the $12M offer seems high and that Dixon should not make the investment without the laminate technology. Even if we relax the assumptions and use the lower end WACC in our range of 14.5% and assume that capital expenditures will be the low end of the range at $475k per annum after 1984, the deal at $12M would still be dilutive because the DCF value is still only $8.9M.[6] At the other extreme, assuming a WACC of 18.5% and capital expenditures of $600k per annum, the plant is only worth $7.5M.

While the model above does not account for the return of working capital at the end of year in 1989, the discounted value of this working capital is only worth about $650k and therefore does not substantially alter the analysis.

Given this analysis, the deal is dilutive and Dixon should not make the investment.

2) Evaluate the marginal impact of the laminate technology (i.e. net present value of the costs savings and expenses assuming that without laminate, graphite costs go up 5% per year after 1984 and power costs rise 12% after 1984).

The laminate technology requires an upfront capital expenditure of $2.25M that can be straight-line depreciated over 10 years. This laminate will eliminate graphite costs completely and reduce power costs by 15-20%. Assuming the
Open Document