Diamond Case Study

Diamond has a very measurable, organized process for assess which capital

expenditure projects it should take on.  Each project is submitted with four main financial metrics

reported (EPS impact, Payback Period, Discounted Cash Flow, and IRR) making it easy to

compare multiple projects and select the best fit for the company.  There is risk in this process,

however, as assumptions used by financial analysts can be inherently biased and must not be

taken at face value.  When a few other conditions are considered for the poly renovation project

the financial metrics, particularly Discounted Cash Flow and IRR, are less desirable than

originally reported.  Although the project still boasts a positive NPV and could be beneficial for

Diamond to take on, the change in assumptions could dramatically impact management’s

decision when choosing between this and another project.

1) What changes, if any, should Lucy Morris ask Frank Greystock to make in his

discounted-cash-flow (DCF) analysis? Why?

What should Morris be prepared to say to:

a. the Transport Division?  

It sounds like the rolling stock would be purchased in 2005 with or without this project.

 Therefore the impact of the project is only accelerating the purchase of the rolling stock by 2

years. Greystock should include the cost of the new rolling stock in 2003 as part of the cost of

the project.  Although the rolling stock belongs to the Transport Division, it is still part of the cost

of the project and impacts the company as a whole.  It would make a stronger business case to

include all of the total costs, not just certain ones.  It could also be considered unethical to

withhold costs in your DCF model on which management will be basing their decisions.

b. the Director of Sales?

The cannibalization of revenues is a very real, probable risk that will be outgrown once

the economy recovers from the