Essay on Victoria Chemicals Case Analysis

1340 Words Aug 20th, 2012 6 Pages
Case Studies Report:
Victoria Chemicals

This report will be covering the several capitals investment aspects in which are associated with the case – Victoria Chemicals PLC (A): The Merseyside Project, written by Robert. F. Bruner.

Introduction
In the case, Victoria Chemicals, a fictional company, were under the pressure of its investors to improve its performance as the earnings per shares (EPS) has decreased from 250 pence in 2006 to 180 pence in 2007. Victoria Chemicals is a producer of polypropylene that has two factories in Merseyside Works and Rotterdam, Holland. In addition, there are seven major competitors in the market producing polypropylene.

As previous management has limited capital expenditure for Victoria
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It is stated that Victoria Chemicals has direct ownership of the tank cars, therefore the extra cost of the transport division which are directly or indirectly associated with the implementation of the project has to be taken into account in the DCF analysis. The main argument in light of this issue is, the project will only have extra profitability if its additional polypropylene productions are distributed in a cost efficient manner, in which it will directly increase the cost of the transport division, and thus it should be incorporated in the profitability analysis of the project.

Table 1: Cost Associated with the Transport Division Factors | Cost | Additional tank cars | £2 million | Additional cost of fuel for transporting | 7% increment | Additional operating expense | £300,000 increment (conservative) |

Sales-Marketing Department and the Project
Scenario 1: If the market is currently in an economic recession and the polypropylene industry is heading towards a downturn, thus sales amount will decrease. In this case, even though the project will result in additional production at lower cost, it will not be fully utilized as the demand of polypropylene decreases and any additional output will be stored in inventory, which will in turn increase the storage cost.

Scenario 2: In an economic recovery, as

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