Victoira Chemcials

Victoria Chemicals Case

Introduction

Victoria Chemicals is a leading producer of polypropylene and was a major player in the worldwide chemicals industry. Victoria Chemicals had two divisions: Intermediate Chemicals Group (ICG) and Transport Division. The company produced polypropylene at Merseyside and in Rotterdam, Holland. The two plants were of identical scale, age, and design. Although Victoria Chemicals had the largest annual output in this industry, its production was infected. Compared with its competitors, Victoria Chemicals had relatively higher production cost. Furthermore, its financial performance cannot be satisfied by its investors since its earnings had fallen to 180 pence/share at the end of 2007 from around 250 pence/share at the end of 2006. Lucy Morris, the new plant manager of Victoria Chemicals’ Merseyside Works in Liverpool, wanted to make some change because the current production has become outdated and fallen behind the industry standards. The current process is more labour intensive and thus more expensive than other competitors in the industry. Morris has proposed a £12 million project to renovate the plant. The project includes: 1.relocating and modernizing tank-car unloading areas, which would enable the process flow to be streamlined; 2. refurbishing the polymerization tank to achieve higher pressures and thus greater throughput; and 3. renovating the compounding plant to increase extrusion throughput and obtain energy savings. If the company proceeds with this project it will achieve 7% greater manufacturing throughput, 1% gross margins increase (from11.5% to 12.5%), and energy savings would be realized of 1.25% in years 1-5 and 0.8% in years 6-10. After this ten-year period the energy efficiency of the plant would revert back to current levels.

So the question is should Victoria Chemicals invest in this project?

When senior management evaluate a project, it must meet at least three out of four performance hurdles, which are:...