Victoria Chemicals Essay example

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I am pleased to share my concerns, analysis and recommendation about the Merseyside Project with you. Your DCF analysis is excellent and helpful. However, I have to make some changes to it. The memo will be divided into 6 parts.  Suggestions for Merseyside project: P1  What should change in the DCF analysis and why: P1-P3  Other important issues: P3-P4  Evaluation of each investment Criteria: P4-P5  Ultimate recommendation and forward looking: P5-P6  Revised DCF analysis: Appendix Changes to capital project? Since reviewing and discussing the proposal, several things have come to light and we are requesting some changes to the DCF analysis to include some potential solutions. First, it is agreed that the price for…show more content…
We suggest that we start the analysis process to get some ideas on the cost of renovating the EPC plant to start producing Polypropylene. This would also increase polypropylene production and possibly alleviate the 45 day shut down that is required in the original proposal. Also, it alleviates potential for the EPC plant to lay off employees if a future abandonment of that project took place. EPC employees would be retained and retrained to produce polypropylene. Also, there are some concerns that if Merseyside would undergo renovations and is able to produce polypropylene cheaper than our sister plant at Rotterdam, then cannibalization would occur. We are not so sure that since we are in different geographical locations and service different areas that cannibalization would occur. But, if a problem would arise and cannibalization is suspected, Victoria Chemicals can enact a price averaging policy for both plants. Although Merseyside may be able to produce and sell polypropylene cheaper than Rotterdam if we average the sales price and have both plants sell at the same price it would alleviate this issue. Lastly, the 10% target rate of return that is used to configure the DCF analysis seems to be inclusionary of the inflation rate. The Treasury staff also thinks that it impounds a 3% long term inflation and therefore has a 7% zero inflation target rate of return.

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