Chemical Diamond Essay
Diamond Chemicals: The Merseyside and Rotterdam Projects Valuation and Recommendation |
Table of Contents
Problem Statement & Issues3
Analysis of Merseyside & Rotterdam3
The Merseyside Proposal & Analysis3
Option to Switch to Japanese or German Technology4
The Rotterdam Proposal & Analysis5
Option to Switch to German Technology5
Appendix I – Black-Scholes Model for Japanese Option8
Appendix II – Merseyside Margrabe Model for German Option8
Appendix III – Merseyside Assumptions9
Appendix IV – Merseyside Discounted Cash Flow Analysis9
Appendix V – Merseyside Depreciation Schedule10 …show more content…
Diamond Chemicals PLC’s (“Diamond”) financial performance has been poor. To improve performance, Diamond can upgrade their polypropylene production at either the Merseyside or Rotterdam plant. The upgrade in either plant would ultimately increase output by 7%. Increasing output at each plant by 7% is not feasible as the increased output will likely cannibalize sales from the other plant.
Basic Outlay /Decision: Diamond must choose between upgrading the Merseyside plant or the Rotterdam plant. In addition, Diamond must consider the value of the options to adopt Japanese or German technology for Merseyside and the option to adopt German technology for Rotterdam.
The following criteria will be used when making a decision between upgrading the two plants: * Impact on Earnings Per Share (“EPS”) must be positive * Payback period must be less than six years * Net Present Value (“NPV”) must be greater than zero * Internal Rate of Return (“IRR”) must be greater than 10% * Plus qualitative factors
The Merseyside Proposal & Analysis:
The upgrade of the Merseyside plant will result in a capital expenditure of £9.0 million. This will result in an increase in polypropylene output by 7% and increase gross margin from 11.5% to 12.5%. However, the entire polymerization line would need to be shut down for 45 days, and Merseyside’s customers will be forced to buy from competitors.
After analyzing Greystock's discounted