Victoria Chemicals Case Study Essay

Words: 1840
Pages: 8

I. Introduction

Victoria Chemicals is one of the leading producers of Polypropelene, a polymer that is used in many products ranging from carpet fibers, automobile automobile components, packaging film and more. When Victoria Chemicals started up in 1967 they built two plants, one in Merseyside, England and one in Rotterdam, Holland. Both plants were identical to each other and produced an equal amount of goods. Morris Greystock, the controller of the Merseyside plant had notice a decline in stock price in from 250 pence per share in 2006 to 180 pence per share in 2007 and knew he had to do something. Facing pressure from the investors and wanting to increase production efficiency, he decided to renovate the Merseyside plant so
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5). After looking over Greystock’s analysis, Andrew Gowen of the treasury staff had a couple suggestions about what rate should be the one being used. He stated that “Cash flows and discount rates need to be consistent in their assumptions about inflation,” which is correct. Historically inflation rates are around 2 to 3%, however in Greystock’s analysis, he did not take this into consideration. This would mean that the real target rate for the company would be at 7%. Trying to stay consistent in the analysis we decided to use a 3% inflation rate and a nominal rate of 10%. This is more accurate since inflation is something that is a constant so to assume 0% inflation is just unrealistic. As seen in exhibit 3, the inflation is not a determining factor in the NPV.

6. After taking everyone’s input into consideration, Greystock’s analysis had to take on a large overhaul. First of all, an inflation rate had to be added, we know that inflation must be counted on in the first year. We decided to let the base year for inflation to be the year before since we thought that it would make more sense to have inflation at the beginning of 2008 instead of it starting in 2009. Our next step was to take into account cannibalization, which is very important since we want to know how much is Rotterdam losing out on by renovating Merseyside. Once we took into account cannibalization, we needed to reduce the work in