Victoria Chemicals

1801 Words Nov 6th, 2010 8 Pages
Group Paper Analysis, Team 4
4/22/2010

Victoria Chemicals (B) Group Case Study

Introduction 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.

Background of Firm

Victoria Chemicals, a major competitor in the worldwide
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The four measures were net present value (NPV), internal rate of return (IRR), the payback period and increases in earnings per share (EPS). Other strategic factors must be considered that are not reflected in the financial tests. James Fawn and his ICG analyst team must decide which project is the best value for the short-term and the long-term. Utilizing these financial hurdles and contemplating other strategic factors, Victoria Chemicals will choose the project that will give the firm the most value.

Constraints on Solution In order to keep up with the competition, Victoria Chemicals must make changes to its business strategy. The project that is accepted must meet several criteria that the board has set based on performance measures. The projects are ranked as engineering efficient proposals. The addition to net income of the project must be positive and therefore increasing earnings per share. The net present value of the project’s free cash flows must be positive, and the internal rate of return must be greater than 10 percent, and the payback period for the project must be less than six years. The transport division will have to increase allocation to Merseyside. The proposal will generate excess capacity for the division and will increase the demand of new tank cars. The costs generated for these cars would cost GBP2 million and have a depreciable life of 10

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