Victoria Chemicals Case Study Essay

1825 Words Dec 7th, 2010 8 Pages
I. Introduction

Victoria Chemicals is one of the leading producers of Polypropelene, a polymer that is used in many products ranging from carpet fibers, automobile automobile components, packaging film and more. When Victoria Chemicals started up in 1967 they built two plants, one in Merseyside, England and one in Rotterdam, Holland. Both plants were identical to each other and produced an equal amount of goods. Morris Greystock, the controller of the Merseyside plant had notice a decline in stock price in from 250 pence per share in 2006 to 180 pence per share in 2007 and knew he had to do something. Facing pressure from the investors and wanting to increase production efficiency, he decided to renovate the Merseyside plant so
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As we see on exhibit 2, the worst case scenario of 100% internal cannibalization still produces a positive NPV of 8.81. The most likely case scenario would produce a possible 50% internal cannibalization and would produce a NPV of 12.94 as seen on exhibit 2. Greystock on the other hand believes that cannibalization is not a relevant cash flow. After reviewing the calculation, the suggestion of director of Sales has merit and is evident that Greystock made a mistake in not including cannibalization in its cash flow.

Griffin Tewitt the assistant plant manager proposed to modernize the separate and independent part of the Merseyside works which was the production line producing ethylene-propylene-copolymer rubber (EPC). This proposal would cost GBP1 million and would improve cash flow by GBP25,000 ad infinitum and would allow them to produce the EPC at the lowest cost in the world. Even this advantage, it would still result in a negative project NPV. Tewitt argued that the positive NPV of the poly renovations would be able to sustain the negative NPV of the EPC project. The important thing to notice is undertaking this project will increase the plant size which directly coincides with the increase in bonus being tied to it. This presents a conflict of interest which is also an agency problem. Another problem is that it would not be very honest because the firm would be hiding critical information from the investors. From this

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