Mersey Side Case Essay Example for Free

Mersey Side Case EssayBackground Problem StatementDiamond chemicals is a starring(p) propylene producer and a major player in the chemicals industry worldwide. However the share of the come with had fallen from 60 at the end of 1999 to 30 in 2000 on account of worldwide economic slowdown and poor pecuniary performance. Given the prevalent scenario, it was time to obtain funds from corpo evaluate military headquarters for a modernization program for Merseyside protrude. This project will not just renovate and rationalize a production line but also make up for deferred maintenance and cast up production efficiency. Lucy Morris is the kit and boodle Manager at Merseyside and by nature she is a high achiever and a Notre dame MBA. frump Greystock is the Controller, President of Diamond Chemicals. To make a compelling case, Frank and Lucy try to make a financial model to calculate the NPV, IRR and Payback period for this project but are challenged on several aspects. To eng age their endeavor, they need to correct the model as per the feedback from the shareholders and management. frankincense the problem statement is to suggest corrections to the existent model and thus calculate the NPV, IRR and payback period which would not be challenged further and the project could be approved. Methodology and ResultsIn addition to the baseline model presented in Exhibit 2 of the case study, foursome cash flow models were built considering the following criteria* Cannibalization This model was directly taken from the case study and was apply as a starting point for reference. This model presents the information that Greystock included on the analysis that was submitted to Morris. Cannibalization of necessity This model reflects a taked output at Rotterdam. The cannibalization aspect is obtained by shifting the added volume from the ready in Holland (Rotterdam) to the plant England (Merseyside) regardless of the fact that both plants operate under the same co mpany.* Excess enamor needed This model accounts for a 2 millionfor the purchase of rolling stock to support the expect growth of the firm. The funds would be used to purchase tank cars to be used at Merseyside. * Including EPC project This model includes the recommendation provided by Griffin Tewitt, assistant plant manager at Merseyside. This model reflects the pestilential effects of including a project that adds no value, to the original model. By itself, the EPC project does not stand a chance of approval, thus the only effect that it has, by bundling with the polypropylene project, is to increase the paylack period, lower NPV and reduce the IRR of the overall project. * Recommended model which consists all the right variables values This model contains all the adjusted variable with the recommendations that our team up would follow, if placed in the position of Morris. This accounts for The Results from these were as follows Baseline Cannibalized Excess Transport EPC Recomm ended IRR 25.9% 21% 22% 21.43% 31.47%NPV (MM) 8.95 5.75 6.16 5.00 13.37 PBP (Yrs) 3.61 4.09 3.95 4.08 3.20Thus we can see for the recommended model as the NPV is 13.4 cardinal and the investment required it 9 one thousand thousand, it is a remunerative project.The recommended model above considers a 3% inflation which varies from 1.2 5.1% in UK. Considering this variation the following graph shows how the NPV and IRR would convert with inflationThe company charges a 3.5% for overhead investments. However, as the project is expected to reduce overhead costs, increase efficiency, output and reduce the power consumption, this overhead investment fee should be waived. If this waiver is implemented, the NPV increases to 15.0 Million. The Purchase equal of Rolling take is currently considered as 2 Million. This would be used for transportation needs arising referable to the anticipated excessive demand.However this investment would be made regardless of the project and hence only a part of the investment should be considered for the modeling purposes. What proportion of the investment would be usedspecifically for this project will determine the value of the Purchase Cost of Rolling Stock that would be in spades lesser than 2 Million. Currently, the model is based on the confidence that the production will run on full capacity and the sales team will be able to sell all of the throughput. This assumption should be tested and, if not valid, the variation should be accounted in the model.Conclusions and Recommendations* Using the recommended model as a basis for comparison, against the original model, Merseyside is a promising project because the NPV is 13.4 Million and the investment cost is 9 Million with a payback period of 3.2 years and IRR of 31.47%. . * Greystocks model did not account for inflation. The inflation rate of 3% should be considered in the final analysis. This reassigns the NPV from 9.7 Million to 13.4 Million, a 3.7 Million difference. * The sunk costs 0.5 Million should not be considered* In case the overhead investment cost can be waived as the project itself aims at reducing overhead investments the NPV would be 15.0 Million * The Purchase Cost of Rolling Stock is considered 2 Million which can be lowered considering the actual increase in transportation * The guest retention can vary and depending on the anticipated demand the NPV, IRR and Payback period might change Referencesi. Darden Business Publishing Diamond Chemicals PLC (A) The Merseyside Project ii. http//www.bankofengland.co.uk/publications/Pages/inflationreport/infrep.aspx iii. Class 1 2 Presentations from Operations Cost and endangerment Management