Victoria Chemicals Plc (a)

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Victoria chemicals PLC (A): the Merseyside Project 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 …show more content…

The project would result in a negative NPV since the EPC market is small. Tewitt claims this negative NPV would be offset by Greystock’s renovation plan. The committee rejected the plan based on economic reasons. In my opinion, Tewitt’s plan is a waste of money to spend in something that holds a small part of the market rather, the money should be spent on something that have a high impact on the market. Also, I have my suspicions about Tewitt’s plan, mainly because of his comment to Greystock and Morris after the committee rejection. In that comment “ in a hushed voice” he told Morris and Greystock that their anuual bonuses are begged to the size of this operation. This makes me think that Tewitt’s plan has a self-interest tied to it, which presents an obvious agency problem. Therefore, I strongly reject his proposal.

Concerns of the treasury staff: After scanning Greystock’s analysis, Andrew Gowman, the treausury staff pointed out a flaw in Grestock’s analysis. The flaw in the analysis was not considering inflation in calculating the discount rate, which would in return have in affect on the cash flows. Gowman suggests a long-term expected inflation of 3%. Adjusting the discount rate for inflation we get a a real discount rate of 7% instead of 10%.

Evaluating capital expenditure proposals at Victoria Chemicals:

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