Diamond Chemica A1

1. Lucy Morris should suggest that Greystock include the following changes in DCF analysis. The NPV of the ₤2MM investment on rail stocks must be compared between year 2005 and 2003. Time value of money should be compared in making the expenditure in 2003 versus 2005 and this costs amounts to ₤0.35MM as displayed in Appendix attachment, item 8. However, there is also a tax benefit of making this investment expenditure and having reduced the taxable income by depreciating the equipment for the transportation division from 2003-2013, two years earlier. The tax effect is minimal (~₤0.08MM) and we have included it in calculating the overall NPV of the project, see appendix line item 8, since it is a benefit that would add value to the transportation division. Furthermore, the sunk costs of preliminary engineering (₤0.50MM) should be omitted from the project since this cost is unrecoverable and the firm is liable for it regardless of the future decision to proceed. By including the costs and benefits associated with the accelerated purchase of the rolling stock within the NPV of the project, Greystock will provide the most reasonable affect of proposed project to the company. This consideration should satisfy the transport division and Greystock should not include the full ₤2MM purchase of the rolling stock within the NPV since the additional rolling stock was planned for 2005 regardless of the excess capacity introduced by the project. Concerns raised by the director of sales about competition seem contradictory considering the potential of the project to increase the company’s efficiency (lower ₤/ton) versus major competitors in the region (exhibit #1 of the case). Second the claim about the cannibalization of the produced outputs by the improved efficiency seems to be speculative as there is no clear indication that the increased efficiency will be at the cost the Rotterdam plant versus any of the other competitors in the region. However, if there is a...