The Merseyside Project
Table of Contents
Executive Summary 3
Problem Statement 3
Key Decision Criteria 4-5
Data Analysis 5-6
Alternatives Analysis 6-7
Action and Implementation Plan 8-9
Victoria Chemicals is a major competitor in the worldwide chemicals industry. They are a leading producer of polypropylene, which is a polymer used in products such as: medical products and carpet fibers. Victoria Chemicals purchases the propylene from four refineries in England, as it is a byproduct of the refining of crude oil into gasoline. Two divisions compose Victoria Chemicals: Intermediate Chemicals Group (ICG) and the Transport Division. …show more content…
Taking into account a worst-case scenario where an increase in output cannot be realized and would stay at the current output levels of 250,000 tons, the following data is obtained and can be seen in Exhibit 3: ( NPV = GBP3.21 million ( IRR = 15% ← EPS = 0.013 x Payback period = Year 7
In both scenarios, at least three of the four decision criteria are met and therefore the project should be accepted.
An alternative approach to the complex issues that Victoria Chemicals is burdened with would be to continue with the planned renovations of the polypropylene production line. In addition to the new renovations, Victoria Chemicals should also include a renovation of the ethylene-propylene-copolymer (EPC) rubber production line. By renovating the EPC line, the company would be able to retain their standing as the largest supplier of EPC, and would have the lowest cost base in the world. The renovation would improve annual cash flows by GBP 25,000. If Victoria Chemicals doesn’t invest in the EPC renovations now, they may run the risk of having to leave the business in three (3) years, or suffer major layoffs of employees.
There are a few problems with this alternative solution. The EPC line proposal has a negative net present value (NPV) when it is a separate capital project; however, when included with the Merseyside project the negative NPV is absorbed and hidden.