Victoria Case

I. Executive Summary:

At the first glance, the implementation of Merseyside project would greatly improve the production line of polypropylene – the dominant polymer product of Victoria Chemicals. An initial investment of £12m would be completely utilized to (1) relocate and modernize tank-car unloading areas, to (2) refurbish the polymerization tank and to (3) renovate the compounding plant. The project is estimated to shut down the plant for 1.5 months in exchange of improving manufacturing throughput by 7% and gross margin to 12.5%. The current NPV is £10.98m; thus, it should be accepted.

A number of concerns from various perspectives draw the attention of management team in evaluating the Merseyside project.

A. The Merseyside Plant: the renovation potentially takes longer than expected due to the fact that Merseyside plant was constructed long time ago which requires more time to deal with. A 17% loss in NPV (to £8.96m) would incur if it takes up to 3 months of construction works.

B. The Proposed Capital: the £0.5m preliminary engineering cost should be excluded because it was a sunk cost incurred nine months ago.

C. Concerns of the Transport Division: there might be chances to include the new rolling stock cost purchased in 2010 of £2m and its depreciation over 10 years. Also, a 1% bonus of executive VPs should be recognized which bring the NPV down by 17.5% to £9.06m.

D. Cannibalization: cannibalization cost regarding the sales loss of Rotterdam would be excluded; it plays minor role in comparison with the existing competition in the industry.

E. EPC Production Line Modernization: the company should not use poly renovation’s positive NPV to sustain -£0.75m of EPC production line modernization. The initial investment of the EPC project (£1m) could be utilized elsewhere.

F. Discount Rate: a discount rate of 13% can be used to evaluate a high cost project.

G. Four Requirement Hurdles: the project meets these requirements in...