Victoria Chemical

Victoria Chemicals (A)

Executive Summary

Victoria Chemicals Merseyside Works production process is old and inefficient compared to its’ competitors. In order to remain competitive, management limited maintenance and other capital expenditure. As a result of competitors’ efficiency, earnings fell from 250 to 180 pence per share in 2007. This triggered a potential corporate raid by Sir David Benjamin. Therefore, creating an urgency to improve performance, a proposal has been made. However, the current project proposal is under scrutiny due to Frank Greystocks’ DCF analysis. It is a concern that some of the assumptions made are not accurate leading to a much more appealing NPV and IRR. This analysis will identify the wrong assumptions and address them with the proper inputs in our own DCF model. Proving that although it is not as appealing, it is still a worthy investment.

Introduction:

In the original assumption we identified several issues that needed to be addressed. These issues are: discount rate does not account for inflation, output level needs to be more conservative, improper allocation of engineering cost, the use of double declining depreciation method, the accelerated cost for new rolling stock was not included, as well as the cannibalization of sales. Now that we identified the issues of the original assumption, we will address them starting with the adjustment of the discount rate

The initial proposal used a nominal discount rate of 10% instead of the real rate of 7% when the 3% inflation is factored into the required rate of return. In our assumptions we changed the rate to include the inflation to the 7% in order to properly analyze the proposal. The initial proposal estimated that this project would increase production by 7%. However, this assumes that we would be operating the plant at full capacity and will have regained the customers we lost to competition due to the plant being closed for 45 days. In our assumptions we lowered...