This report will be covering the several capitals investment aspects in which are associated with the case – Victoria Chemicals PLC (A): The Merseyside Project, written by Robert. F. Bruner.
In the case, Victoria Chemicals, a fictional company, were under the pressure of its investors to improve its performance as the earnings per shares (EPS) has decreased from 250 pence in 2006 to 180 pence in 2007. Victoria Chemicals is a producer of polypropylene that has two factories in Merseyside Works and Rotterdam, Holland. In addition, there are seven major competitors in the market producing polypropylene.
As previous management has limited capital expenditure for Victoria …show more content…
As a result of the two economic scenarios stated, the proposal of the project should incorporate the market environment into its account to have better understanding of the cost-benefit of the project.
With regards to the concern of cannibalization of the Merseyside plant and Rotterdam plant; in our opinion, there would not be any problems arising from this issue. The reason being, the plants are assumed to be operating to accommodate for different markets, therefore, to a fair extend, the improvement in the Merseyside plant would not affect nor cannibalize the Rotterdam plant.
Assistant Plant Manager Suggestion and the Project
In our opinion, even though the refurbishment of the production line of ethylene-propylene-copolymer rubber (EPC) has negative NPV of -£750,000, it should be implemented with the project. The main reason being is the economies of scale by implementing the EPC production line refurbishment with the polypropylene production line refurbishment. The £1M of initial calculated cost of the EPC refurbishment can be lowered if the two refurbishment projects are implemented together to achieve economies of scale. Furthermore, the potential exploitation of the EPC market being the lowest EPC cost base