Investment

VICTORIA CHEMICALS PLC (A) AND (B)

Teaching Note

Synopsis and Objectives

Suggestions for comple-mentary cases regarding capital budgeting: “Worldwide Paper Co.” (Case 18), “Aurora Textile,” (Casse 20).

These two cases present the capital investment decisions under consideration by executives of a large chemicals firm in January 2008. The A case (Case 22) presents a go/no-go project evaluation regarding improvements to a polypropylene production plant. The B case (Case 23) reviews the same project but from one level higher, where the executive faces an either/or investment decision between two mutually exclusive projects. The objective of the two cases is to expose students to a wide range of capital budgeting issues:

A case: go/no-go decision

1. The identification of relevant cash flows; in particular, the treatment of:

a. sunk costs

b. cash flows obtained by cannibalizing another activity within the firm

c. exploitation of excess transportation capacity

d. corporate overhead allocations

e. cash flows of unrelated projects

f. inflation.

2. The critical assessment of a capital-investment evaluation system.

3. The treatment of conflicts of interest and other ethical dilemmas that may arise in investment decisions.

B case: either/or decision

The relevance of cash flows from assets that may be separable from the core project.

2. The classic crossover problem, in which project rankings disagree on the basis of net present value (NPV) and internal rate of return (IRR).

3. The assessment of real option value latent in managerial flexibility to change operating technologies.

4. The identification of some classic games or types of human behavior that can be counterproductive in the resource-allocation process.

Supporting Spreadsheet Files

Two Excel spreadsheet files support student analysis of these cases. Making those files available in advance to students...