Victoria Chemicals plc (B): The Merseyside and Rotterdam Project Andrean Darma Lukita Bramantya Harimurti Ila Nurhidayati Nabila Hilmy Zhafira Soraya Inayah Fidran
Dec 08, 2015
Victoria Chemicals plc (B):
The Merseyside and Rotterdam Project
Andrean Darma LukitaBramantya HarimurtiIla NurhidayatiNabila Hilmy ZhafiraSoraya Inayah Fidran
Issues from other departements
1.Transport division 2.Sales department3.Assistant plant manager 4.Treasury staff
The Merseyside project had a higher IRR and a much lower payback period. Rotterdam had a higher NPV by almost half a million pounds, and a larger growth in EPS
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Merseyside Rotterdam
NPV £12.45m £15.5m
IRR 24% 18.0%
PBP 3.78 years 7.95 years
Growth in EPS £0.022 £0.048
Transport Division
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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 20211 Gross Profit
New Output 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 Lost Output (Konstruksi (33,438) New Sales 157.99 180.56 180.56 180.56 180.56 180.56 180.56 180.56 180.56 180.56 180.56 180.56 180.56 180.56 New Gross Margin 13.8% 13.8% 13.8% 13.8% 13.8% 13.3% 13.3% 13.3% 13.3% 13.3% 12.5% 12.5% 12.5% 12.5% New Gross Profit 21.72 24.83 24.83 24.83 24.83 23.92 23.92 23.92 23.92 23.92 22.57 22.57 22.57 22.57 New COGS Margin 86.3% 86.3% 86.3% 86.3% 86.3% 86.8% 86.8% 86.8% 86.8% 86.8% 87.5% 87.5% 87.5% 87.5% New COGS 136.27 155.74 155.74 155.74 155.74 156.64 156.64 156.64 156.64 156.64 157.99 157.99 157.99 157.99
Old Output 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 Old Sales 168.75 168.75 168.75 168.75 168.75 168.75 168.75 168.75 168.75 168.75 168.75 168.75 168.75 168.75 Old Gross Profit 19.41 19.41 19.41 19.41 19.41 19.41 19.41 19.41 19.41 19.41 19.41 19.41 19.41 19.41
Incremental GP 2.32 5.42 5.42 5.42 5.42 4.52 4.52 4.52 4.52 4.52 3.16 3.16 3.16 3.16
2 WIP Inventory New WIP Inventory 4.09 4.67 4.67 4.67 4.67 4.70 4.70 4.70 4.70 4.70 4.74 4.74 4.74 4.74 Old WIP Inventory 4.48 4.48 4.48 4.48 4.48 4.48 4.48 4.48 4.48 4.48 4.48 4.48 4.48 4.48 Incremental WIP (0.39) 0.19 0.19 0.19 0.19 0.22 0.22 0.22 0.22 0.22 0.26 0.26 0.26 0.26
3 Depreciation New Depreciation 1.6 1.39 1.2 1.04 0.9 0.78 0.68 0.59 0.55 0.55 0.55 0.55 0.55 0.55 New Depreciation Rolling Stock 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 Total New Depreciation 1.6 1.39 1.2 1.24 1.1 0.98 0.88 0.79 0.75 0.75 0.75 0.75 0.75 0.55 Nilai Buku Asset 12 10.4 11.01 9.81 8.57 7.47 6.49 5.61 4.82 4.07 3.32 2.57 1.82 1.07
4 Overhead 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.425 Prelim Engineering Cost
Pretax Incremental Profit 0.30 3.61 3.80 3.96 4.10 3.32 3.42 3.51 3.55 3.55 2.19 2.19 2.19 2.19 After Tax Incremental Profit 0.21 2.53 2.66 2.77 2.87 2.32 2.39 2.46 2.48 2.48 1.54 1.54 1.54 1.54
6 Cash Flow Adjustment Capex -12 Transport Division -2 Add back depreciation 1.6 1.39 1.2 1.04 0.9 0.78 0.68 0.59 0.55 0.55 0.55 0.55 0.55 0.55 WIP Inventory 0.39 (0.58) - - - (0.03) - - - - (0.04) - - -
7 Free Cash Flow -12 2.20 3.33 1.86 3.81 3.77 3.08 3.07 3.05 3.03 3.03 2.05 2.09 2.09 2.09 EPS Contribution 0.02 0.04 0.02 0.04 0.04 0.03 0.03 0.03 0.03 0.03 0.02 0.02 0.02 0.02
NPV : £9.09 11.21 IRR : 22.29% 12EPS : 0.03 (0.79) (0.07) PBP 4 tahun
EFFECT ON DCF NPV = £9.09
IRR = 22.29%
PBP = 4 tahun
Impact on EPS = 0.03
Conclusion : Project still feasible
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ICG Sales and Marketing Department
Tidak dipertimbangkan dengan alasan :
Sales Cannibalization adalah short-term consideration’Merseyside project dilaksanakan dalam jangka panjangSelama masa proyeksi (15 tahun) market size produk poliprone diharapkan meningkat sehingga tidak terjadi idle capacity
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Assistant Plan Manager
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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 20211 Gross Profit
New Output 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 Lost Output (Konstruksi (33,438) New Sales 157.99 180.56 180.56 180.56 180.56 180.56 180.56 180.56 180.56 180.56 180.56 180.56 180.56 180.56 New Gross Margin 13.8% 13.8% 13.8% 13.8% 13.8% 13.3% 13.3% 13.3% 13.3% 13.3% 12.5% 12.5% 12.5% 12.5% New Gross Profit 21.72 24.83 24.83 24.83 24.83 23.92 23.92 23.92 23.92 23.92 22.57 22.57 22.57 22.57 New COGS Margin 86.3% 86.3% 86.3% 86.3% 86.3% 86.8% 86.8% 86.8% 86.8% 86.8% 87.5% 87.5% 87.5% 87.5% New COGS 136.27 155.74 155.74 155.74 155.74 156.64 156.64 156.64 156.64 156.64 157.99 157.99 157.99 157.99
Old Output 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 Old Sales 168.75 168.75 168.75 168.75 168.75 168.75 168.75 168.75 168.75 168.75 168.75 168.75 168.75 168.75 Old Gross Profit 19.41 19.41 19.41 19.41 19.41 19.41 19.41 19.41 19.41 19.41 19.41 19.41 19.41 19.41
Incremental GP 2.32 5.42 5.42 5.42 5.42 4.52 4.52 4.52 4.52 4.52 3.16 3.16 3.16 3.16
2 WIP Inventory New WIP Inventory 4.09 4.67 4.67 4.67 4.67 4.70 4.70 4.70 4.70 4.70 4.74 4.74 4.74 4.74 Old WIP Inventory 4.48 4.48 4.48 4.48 4.48 4.48 4.48 4.48 4.48 4.48 4.48 4.48 4.48 4.48 Incremental WIP (0.39) 0.19 0.19 0.19 0.19 0.22 0.22 0.22 0.22 0.22 0.26 0.26 0.26 0.26
3 Depreciation New Depreciation 1.6 1.39 1.2 1.04 0.9 0.78 0.68 0.59 0.55 0.55 0.55 0.55 0.55 0.55 Nilai Buku Asset 12 10.4 9.01 7.81 6.77 5.87 5.09 4.41 3.82 3.27 2.72 2.17 1.62 1.07
4 Overhead 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.425 Prelim Engineering Cost
Pretax Incremental Profit 0.30 3.61 3.80 3.96 4.10 3.32 3.42 3.51 3.55 3.55 2.19 2.19 2.19 2.19 After Tax Incremental Profit 0.21 2.53 2.66 2.77 2.87 2.32 2.39 2.46 2.48 2.48 1.54 1.54 1.54 1.54
6 Cash Flow Adjustment Capex -13 Add back depreciation 1.6 1.39 1.2 1.04 0.9 0.78 0.68 0.59 0.55 0.55 0.55 0.55 0.55 0.55 WIP Inventory 0.39 (0.58) - - - (0.03) - - - - (0.04) - - - Cash Addition 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03
7 Free Cash Flow -13 2.23 3.36 3.89 3.84 3.80 3.10 3.10 3.07 3.06 3.06 2.07 2.11 2.11 2.11 EPS Contribution 0.02 0.04 0.04 0.04 0.04 0.03 0.03 0.03 0.03 0.03 0.02 0.02 0.02 0.02
NPV £9.72 13.31 IRR 22.70% 12EPS 0.03 1.31 0.11 PBP 3 tahun 2 bulan
EFFECT ON DCF NPV : £9.72
IRR : 22.70%
PBP : 3 tahun 2 bulan
Impact on EPS : 0.03
Project still feasible
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Treasury – discount rate changes from 10% into 7%
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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 20211 Gross Profit
New Output 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 Lost Output (Konstruksi (33,438) New Sales 157.99 180.56 180.56 180.56 180.56 180.56 180.56 180.56 180.56 180.56 180.56 180.56 180.56 180.56 New Gross Margin 13.8% 13.8% 13.8% 13.8% 13.8% 13.3% 13.3% 13.3% 13.3% 13.3% 12.5% 12.5% 12.5% 12.5% New Gross Profit 21.72 24.83 24.83 24.83 24.83 23.92 23.92 23.92 23.92 23.92 22.57 22.57 22.57 22.57 New COGS Margin 86.3% 86.3% 86.3% 86.3% 86.3% 86.8% 86.8% 86.8% 86.8% 86.8% 87.5% 87.5% 87.5% 87.5% New COGS 136.27 155.74 155.74 155.74 155.74 156.64 156.64 156.64 156.64 156.64 157.99 157.99 157.99 157.99
Old Output 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 Old Sales 168.75 168.75 168.75 168.75 168.75 168.75 168.75 168.75 168.75 168.75 168.75 168.75 168.75 168.75 Old Gross Profit 19.41 19.41 19.41 19.41 19.41 19.41 19.41 19.41 19.41 19.41 19.41 19.41 19.41 19.41
Incremental GP 2.32 5.42 5.42 5.42 5.42 4.52 4.52 4.52 4.52 4.52 3.16 3.16 3.16 3.16
2 WIP Inventory New WIP Inventory 4.09 4.67 4.67 4.67 4.67 4.70 4.70 4.70 4.70 4.70 4.74 4.74 4.74 4.74 Old WIP Inventory 4.48 4.48 4.48 4.48 4.48 4.48 4.48 4.48 4.48 4.48 4.48 4.48 4.48 4.48 Incremental WIP (0.39) 0.19 0.19 0.19 0.19 0.22 0.22 0.22 0.22 0.22 0.26 0.26 0.26 0.26
3 Depreciation New Depreciation 1.6 1.39 1.2 1.04 0.9 0.78 0.68 0.59 0.55 0.55 0.55 0.55 0.55 0.55 Nilai Buku Asset 12 10.4 9.01 7.81 6.77 5.87 5.09 4.41 3.82 3.27 2.72 2.17 1.62 1.07
4 Overhead 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.425 Prelim Engineering Cost
Pretax Incremental Profit 0.30 3.61 3.80 3.96 4.10 3.32 3.42 3.51 3.55 3.55 2.19 2.19 2.19 2.19 After Tax Incremental Profit 0.21 2.53 2.66 2.77 2.87 2.32 2.39 2.46 2.48 2.48 1.54 1.54 1.54 1.54
6 Cash Flow Adjustment Capex -12 Add back depreciation 1.6 1.39 1.2 1.04 0.9 0.78 0.68 0.59 0.55 0.55 0.55 0.55 0.55 0.55 WIP Inventory 0.39 (0.58) - - - (0.03) - - - - (0.04) - - -
7 Free Cash Flow -12 2.20 3.33 3.86 3.81 3.77 3.08 3.07 3.05 3.03 3.03 2.05 2.09 2.09 2.09 EPS Contribution 0.02 0.04 0.04 0.04 0.04 0.03 0.03 0.03 0.03 0.03 0.02 0.02 0.02 0.02
NPV £14.36 13.21 IRR 24.73% 12EPS 0.03 1.21 0.10 PBP 3 tahun 2 bulan
Solutions There is a conflict existing between these two mutually exclusive projects. Therefore, we will choose the best project based on the best criterion, which is NPV because NPV assumes reinvestment at the cost of capital and that is generally the best assumption. Hence, the Rotterdam project should be chosen.
Alternative Solutions
We believe the discount rate should be adjusted. We used the 7% discount rate which was deemed more accurate. We also accounted for a 3% inflation premium.
Implementation of Alternatives
The expected Net Present value of the Rotterdam project using the revised discount rate and premium is GBP 27.79million. NPV gives explicit consideration to the time value of money and is a good method to evaluate the project because it assesses all the cost involved. When the NPV of the project is greater than zero, then the firm can believe that this is an acceptable project. This new NPV shows that the
project is a great investment. If they were to account for full erosion of Rotterdam’s
business volume, there would still be a positive NPV for Merseyside and above the hurdle rate. The new IRR is 10.5% and this holds the project at an 3.5% higher rate than minimally expected for a project. This IRR represents the project in a positive light.
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Conclusion
James Fawn did have an extremely difficult decision to make. Although the Merseyside project passed all four criteria for further consideration, it was NPV
which ultimately prevailed as the superior criterion. Therefore, Fawn should select the Eustace proposal.