American Chemical Corporation Analysis

American Chemical Corporation Analysis

Background

American Chemical Corporation, one of the largest chemical companies in the United States, is offering to buy all shares of a paper and pulp company, Universal Paper Corporation. Universal opposed the takeover and sued. Although American denied it was buying the company to reduce its competition, they decided to divest a sodium chlorate plant in Collinsville Alabama. The Collinsville plant has been researching another method of permanent laminate to increase efficiency and profitability. American has found a buyer for their plant, Dixon Corporation. Dixon has offered to purchase the facility for $12 million; also, they needs to decide if after purchasing the company they would want to spend another $2.25 million installing laminate technology in the plant.

Assumptions

* Plant life is 10 years

* Salvage value of the plant is $0

* Tax rate is 48%

* Risk premium is 5%

Outcome

Collinsville without laminate NPV = $11,958,271

Collinsville with laminate NPV = $19,849,428

The difference in net present value comes from the capital expenditure of $2.25 million to install the laminate, the depreciation of that expenditure over 10 years, the elimination of graphite costs, and savings in power.

*These calculations were based on the idea that the laminate installation would be complete December 30, 1980, therefore, the graphite costs and power savings start in 1981.

Recommendation

Based on the calculations, Dixon should purchase Collinsville with the intension of installing the laminate process. The $12 million offered exceeds the NPV of Collinsville without laminate, however, if Dixon does proceed with the process, then their NPV will exceed their investment of $14.25 million ($12 million + $2.25 million). By acquiring Collinsville, Dixon can increase its product range and begin to enter new markets.