Polypropylene Manufacturing Case

The relatively well posed project with promises of great future pay offs must be examined closely nevertheless to determine its true profitability. As such, the Super Project’s NPV must be calculated, however before we proceed we must acknowledge the relevant cash flows. The project incurred an expense of testing the market. This expense, however, must not be included in our cash flow analysis because it can be considered a sunk cost. This expense is required for ‘taking a temperature’ of the market and will not be recovered. Other sources of cash flow include:

1. Should Arauco build the Nueva Aldea project? (Hint: Estimate the project Net Present Value and provide a recommendation considering quantitative and qualitative arguments)

Decision Making Area 3:Investment Decisions * Table of Articles * Summary of Articles * Observations * Conclusion

Internal Rate of Return is a discount rate in which the net present value of an investment becomes zero. The investment should be accepted if the IRR is not less than the cost of capital. The IRR measures risk, by showing what the discounted rate would have to reach to lose all present value. Futronics Inc. investment would have an IRR of 14.79%. The investment should be accepted since it is greater than the 8% cost of capital. The 14.79% IRR shows the growth expected from the

This decision may be the result of a conservative policy pursued by a firm. Restriction may be imposed on divisional heads on the total amount that they can commit on new projects.Another internal restriction for capital budgeting decision may be imposed by a firm based on the need to generate a minimum rate of return. Under this criterion only projects capable of generating the management’s expectation on the rate of return will be cleared.

Now we want to examine the analysis business report concerning the cost of capital that has been increased at 28% in accordance with the Net Present Value which is $500,000 the question being would still be worth it to make the investment to the company (Needles, 2010). While at the same time the internal rate of return is still at 21% which is lower than the 25% in the expenditures. In reflection of these calculations the investment would not

Virtually all general managers face capital-budgeting decisions in the course of their careers. Among the most common of these is the either/or choice about a capital investment. The following describes some general guidelines to orient the decision-maker in these situations.

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.

The use of an accounting rate of return also underscores a project 's true future profitability because returns are calculated from accounting statements that list items at book or historical values and are, thus, backward-looking. According to the ARR, cash flows are positive due to the way the return has been tabulated with regard to returns on funds employed. The Payback Period technique also reflects that the project is positive and that initial expenses will be retrieved in approximately 7 years. However, the Payback method treats all cash flows as if they are received in the same period, i.e. cash flows in period 2 are treated the same as cash flows received in period 8. Clearly, it ignores the time value of money and is not the best method employed. Conversely, the IRR and NPV methods reflect that The Super Project is unattractive. IRR calculated is less then the 10% cost of capital (tax tabulated was 48%). NPV calculations were also negative. We accept the NPV method as the optimal capital budgeting technique and use its outcome to provide the overall evidence for our final decision on The Super Project. In this case IRR provided the same rejection result; therefore, it too proved its usefulness. Despite that, IRR is not the most favorable method because it can provide false results in the case where multiple negative

Net Present Value and Internal Rate of Return can disagree when the initial investments are substantially different as well but in this case the initial investment was the same.

As a world wide major competitor in the chemical industry, Victoria Chemicals is a leading producer of polypropylene, a polymer that is used in a variety of products around the globe. Polypropylene is known for its strength and malleability and was priced as a commodity. The company operates two plants that produce polypropylene, one at Merseyside, England and the other at Rotterdam, Holland. Both plants were identical in scale, design, and age. However, Morris Greystock, the manager for the Merseyside plant saw a decline in the company’s stock, and decided to improve the position of the company. To do that, she came up with a project to increase production efficiency, rationalize the

Overall, the ranking lists shown that the project of Strategic Acquisition should be accept by the board directors, because it has a highest IRR and NPV, the second high Profitability Index and 5 years payback, although the initial investment is really big but still the return is worse to do. The total investment of this project will be EUR55 million. The second recommend project will be the project of Southward Expansion. This project has a high IRR and NPV, the initial investment is EUR30 million, it is the 3rd in the ranking list of Project Spending and it is the 2nd in the ranking list of Project Net Cash Flow about EUR56.25 million, The payback is 5 years too. Because the project of Effuent-Water Treatment at Four Plants is highly recommend so right now we have total capital budget EUR91 million. Based on all the ranking list, the project of the Artificial Sweetener will be the last recommendation for the new year capital budget. This project has the 3rd highest IRR and NPV, the return is the 4th in the list about EUR42.75 million and payback is also 5 years. They expenditure for this project is EUR27 million. So the total budget will be EUR118 million include Strategic Acquisition, Southward Expansion, Artificial Sweetener and Effuent-Water Treatment at Four Plants.

One of the critical problems confronting management and the board of Pioneer Petroleum Corporation was the determination of a minimum acceptable rate of return on new capital investments, The company’s basic capital budgeting approach was to accept all proposed investments with a positive net present value when discounted at the appropriate cost of capital. At issue was how the appropriate discount rate would be determined.

The following paper analyzes a project from financial perspectives using the capital budgeting techniques like Net Present Value (NPV) and Internal Rate of Return (IRR).

Project appraisal techniques are used to evaluate possible investment opportunities and to determine which of these opportunities will generate the best return to the firm’s shareholders. Therefore, it is vital for the firm if they wish to continue receiving funds from shareholders to employ the best techniques available when analysing which investment opportunities will give the best return. There are two types of project appraisal techniques: non-discounted cash flows and discounted cash flows. The Net Present Value and internal rate of return, examples of discounted cash flows, are in use in many large corporations and regarded as more effective than the traditional techniques of payback and accounting rate of return. In this paper, I