Diamond Case

Case Summary: Two projects are said to be mutually exclusive when they cannot be undertaken simultaneously and acceptance of one project eliminates the other from consideration (Wiki Answers). In this case, Diamond's strategic-analyst argued that it would not make sense to invest in both projects. The industry is in downturn and Diamond is facing intense competition from competitors thereby hurting its profit margins. Therefore, they would not be able to sell the 14% increase in output without negatively affecting its profit margins. Also, once the decision to pursue a particular project is made, it cannot be reversed i.e. if Diamond undertakes but is not able to implement the Rotterdam project successfully, it cannot back out and then start implementing the Merseyside project.

There are many problems in the Rotterdam proposal. The new technology to be implemented has only been used on a smaller polypropylene facility. So it is not sure whether the new technology would bring any significant improvement in cost/output for a large producer like Diamond. Also this technology would be very expensive to dismantle and would be practically impossible for them to switch to more advanced and efficient German technology. The following corrections has also been proposed in DCF analysis: (a) an opportunity cost of £2.5 million (difference between right-of-ways today price and the price at which it was purchased earlier) is considered and tax exemption is availed on it. (b) £3.5 million is depreciated over a period of 15 years. (c) Also, as Diamond's business is not land speculation, the terminal value of land should not be used in DCF analysis. (d) Overhead costs should not be included and 3% inflation rate should be included in the DCF calculation (see Exhibit-1). Diamond selects those proposals that meets its four performance "hurdles" and the board was receptive to certain strategic factors as well (Exhibit-3(a)&(b)). In the DCF analysis of Merseyside project, I have assumed no overhead cost, no preliminary engineering cost, an inflation rate of 3%, cost and depreciation of new tank cars and 7% erosion of Rotterdam volume (Exhibit-2). Based on NPV, IRR and Payback Period Merseyside proposal seems to be the winner as it has better NPV and IRR and smaller Payback Period. The Payback Period for Rotterdam is more than 6 years and hence it does not meet one of the performance hurdles. From average annual addition to EPS it seems that Rotterdam proposal is better but in this case the investment is funded over a period of 4 years. Hence, the average annual addition to EPS could not be considered as an investment criteria because it would always generate skewed results. Strategically, Merseyside seems to be a better proposal as it provides the flexibility to implement the superior German technology later in the production process. That flexibility is not provided by the