Diamond Chemicals

I. Summary

Diamond Chemicals operates two large polypropylene production plants, the Merseyside plant in England, and the other in Rotterdam, Holland. Diamond Chemicals’ plant manager Lucy Morris and Frank Greystock, Moriss’ controller are recommending a £9million project to renovate and rationalize a production line to make up for deferred maintenance and to increase production efficiency. Greystock has developed a discounted cash flow (DCF) analysis for the proposed project, however several objections to the project have been raised by various divisions, and the initial analysis from Greystock must be evaluated for accuracy.

After careful consideration, we conclude that Diamond Chemicals should move forward with the proposed Merseyside renovations. However, we have identified a number of flaws and outstanding issues with the initial analysis. In the following report, we will identify these issues, propose and analyze alternative solutions, and ultimately provide recommendations on how to properly assess the viability of the Merseyside project.

II. Identification of Key Problems

Key Problems:

In order to further analyze the viability of the Merseyside project, we have identified four key problems that must be addressed: 1) Transportation Division Costs; 2) Inflation; 3) Cannibalization; and 4) Lost Sales.

The Transportation Division controller has raised the concern that the increase in throughput projected once the project is complete will require the acceleration of the purchase of new rolling stock, at a cost of $2M. To address the problem, we must decide if this cost is relevant to the investment decision and if so, specifically how it should be reflected in the DCF analysis.

Treasury recommends the need to include expected inflation. Currently the DCF analysis of the Merseyside project does not take into account an expected inflation rate which can affect real required return of the project, sales price, energy saving costs,...