Submitted by: Submitted by ujjwalchadha13
Views: 466
Words: 1789
Pages: 8
Category: Business and Industry
Date Submitted: 08/23/2013 12:02 PM
Diamond Chemicals PLC (B): Merseyside and Rotterdam Projects
James Fawn, executive vice president of the Intermediate Chemicals Group (ICG) of Diamond Chemicals, met with his financial analyst, John Camperdown, to review two mutually exclusive capital-expenditure proposals. The firm’s capital budget would be submitted for approval to the board of directors early in February 2001, and any projects proposed by Fawn for the ICG had to be forwarded soon to the chief executive officer of Diamond Chemicals for his review. Plant managers in Liverpool and Rotterdam had independently submitted expenditure proposals, each of which would expand the polypropylene output of their respective plants by 7 percent.1 Diamond Chemicals’ strategic-analysis staff argued strenuously that a companywide increase in polypropylene output of 14 percent made no sense, but half that amount did. Thus, Fawn could not accept both projects; he could sponsor only one for approval by the board. Corporate policy was to evaluate projects based on four criteria: (1) net present value (NPV), computed at the appropriate cost of capital, (2) internal rate of return (IRR), (3) payback, and (4) growth in earnings per share. In addition, the board of directors was receptive to “strategic factors”—considerations that might be difficult to quantify. The manager of the Rotterdam plant, Elizabeth Eustace, argued vociferously that her project easily hurdled all the relevant quantitative standards and that it had important strategic benefits. Indeed, Eustace had interjected these points in two recent meetings with senior management and at a cocktail reception for the board of directors. Fawn expected to review the proposal from Lucy Morris, manager of the Liverpool plant, at this meeting with Camperdown, but he suspected that neither proposal dominated the other on all four criteria. Fawn’s choice would apparently not be straightforward. THE PROPOSAL FROM MERSEYSIDE, LIVERPOOL The project for the Merseyside plant...