Victoria Chemicals is a major competitor in the worldwide chemical industry. They are a leading producer of polypropylene, which is a polymer used in products such as medical products and automobile components. Victoria Chemicals started up in 1967 when 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. In 2008 these two plants have an old-fashioned production process of polypropylene and the production costs are some of the highest in the industry. The plants need to be renovated and rationalized. Victoria Chemicals was also under pressure from investors to improve their …show more content…
Looking from an external perspective we have chosen to remove the overhead cost due to get a more accurate result when comparing two projects cash flows and disregarding the cooperate policy for the chance of getting mislead.
Cannibalization is when sales of a new product displace sales of an existing product . A consequence of a decision to invest in any of the two plants will lead to a reduction in sales of the other plant; this cost should therefore be included in the project plan. This has been taken into account in Rotterdam where NPV and IRR have been calculated with and without compensation for cannibalization but in Merseyside this cost has not been included at all.
Victoria Chemicals managed the distribution of the main component (propylene gas) in their product through a fleet of self-owned tank cars, which was controlled by a cost centre called the Transport Division, to the Merseyside plant. In order to be able to supply Merseyside with the extra quantity needed if the investment was realized, the Transport Division could use existing excess capacity of transport capability. Even though this internal service would not come with a charge, an opportunity cost would emerge as the transport resource could have been utilized in a way that potentially could bring an income instead. Therefore it should be seen as an incremental cost to the