Victoria Chemicals Plc(a)

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Case 22: Victoria Chemicals
The Merseyside Project

Table of Contents
Executive Summary 3
Problem Statement 3
Key Decision Criteria 4-5
Data Analysis 5-6
Alternatives Analysis 6-7
Recommendations 8
Action and Implementation Plan 8-9
Exhibits 10
References 11
Executive Summary
Victoria Chemicals is a major competitor in the worldwide chemicals industry. They are a leading producer of polypropylene, which is a polymer used in products such as: medical products and carpet fibers. Victoria Chemicals purchases the propylene from four refineries in England, as it is a byproduct of the refining of crude oil into gasoline. Two divisions compose Victoria Chemicals: Intermediate Chemicals Group (ICG) and the Transport Division.
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Data Analysis
When first analyzing the cash flows of Victoria Chemical’s it is necessary to adjust the cash flows to recognize the expected 3% inflation in both sales and costs each year. Also, the added cost of GBP 2 million needs to be accounted for since the added rolling stock of the transport division is directly related to the increased output of the project. Once these two items have been accounted for, it is assumed that the added output could be sold at current prices of GBP675 per ton. The following data is obtained from Exhibit 2: ( NPV = GBP11.42 million ( IRR = 25% ( EPS = GBP0.027 per share ( Payback period = Year 5
However, the polypropylene industry is a fiercely competitive industry that has a cyclical business cycle with periods of strong sales and periods of oversupply that would lower the overall price that polypropylene could be sold for. To account for worries of oversupply and its effect on price, it is necessary to find the variable cost of producing. After finding Victoria Chemicals variable cost of producing, the variable costs of all other producers can be obtained. As can be seen in Exhibit 1, the current variable cost of producing at Victoria Chemicals is GBP 597.38 per ton. The variable cost of producing is highest for the next ten largest plants at GBP 652.19 per ton with a market share of 21%. It is highly unlikely that these

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