Diamond Chemicals the Merseyside Project

Diamond Chemicals

The Merseyside Project

ABSTRACT The purpose of this executive summary is to analyze Frank Greystock’s DCF Analysis of the Merseyside project, impacts to related departments, and overall appeal of the project to the Diamond enterprise.

Upon investigation of the DCF analysis prepared by Frank Greystock, we suggest several changes that will enable a more accurate assessment of the attractiveness of the Merseyside project. These changes have been implemented in the attached appendix: 1. If Greystock is going to use a 10% hurdle rate as a nominal target rate of return, then he should allow sales price (price/ton in pounds sterling) to grow at the expected inflation rate of 3% annually. This correction is reflected in the “New Sales (Millions)” line. 2. Greystock should remove the preliminary engineering costs of 500,000 in Year 1, as this money had already been spent over the prior nine months and therefore is a sunk cost. 3. We believe that the formula to calculate “Lost Output—Construction” erroneously calculates this on the basis of the new output level. This lost output of 1.5 months should be based on the old output level, as the firm sacrifices a previous output capacity to implement the project. 4. Just as sales prices should be allowed to increase with inflation, so too should overhead costs grow with inflation, since salaries and expenses that are generally tied to overhead will grow. 5. The DCF analysis needs to properly account for the acceleration of the rolling stock purchase by two years by placing this capital expense in Year 3 (2003), then subsequently showing a related savings in Year 5 (2005). Similarly, the change in the depreciation schedule of this asset needs to be reflected appropriately in the depreciation add-back after taxes. Morris’ response to the transport division should be to illustrate that, from an enterprise standpoint, the appropriate consideration of these costs is to use the “with-without principle”, placing...