Diamond Chemicals Plc Sales Department

Diamond Chemicals PLC (A)

The Merseyside Project

GROUP PAPER – TEAM #01

Brendon Martin

Hui Huang

Kai-Hsun Wang

Sonu Chhabra

Yini Song

Project Risk and Cost Management

By Prof. Jennifer Eigo

Executive Summary

The Merseyside Plant of Diamond Chemicals has proposed to renovate and rationalize production line of its plant because of external pressure and internal demands of innovation. The project was estimated to have greater annual throughput and gross margins. However, thru due diligence questions and concerns have been stated by four divisions of the company as well as the fact that the plant needs to be shut down for 45 days.

By analysing all the concerns, we included the transportation division’s concerns because excess capacity was highly relevant to our project.  But we didn’t include any cannibalization cost. We adjusted the lost output as percentage of old output instead of the new output and removed the preliminary engineering cost. We updated the inflation adjustments and rejected EPC project as that project had different objectives. Finally, we got new Net Present Value (NPV), Internal Rate of Return (IRR), Earnings per share (EPS), and Payback Period. All of those values still met the investment requirement, therefore, the project should be undertaken.

Statement of the Problem

Lucy Morris, the Merseyside plant manager, wants to pursue a plant modernization project. The proposed project would bring long term opportunities for the company but required hefty capital funding of GBP 9 million. The project also raised concerns for some of the other major stakeholders within the company.

The transportation department estimated an acceleration in the investment of GBP 2 million to deal with the excess capacity requirements raised by this project. The assistant plant manager, Griffin Tewitt, was working on another proposal to improve the production line for ethylene-propylene-copolymer rubber (EPC). ICG Sales and Marketing Department worried about the updated facilities cannibalizing the Rotterdam Facility (another plant facility within the distribution network). The department also thought the sales figure is wrong because of the plant shutdown. And the Treasury Staff states the real target rate of return is 7% due to inflation and the treatment of preliminary engineering cost is wrong.

The objective of the case study is to evaluate the Merseyside project proposal and estimate its financial impact on company, undertake concerns of other departments and people regarding the project, and draw a conclusion regarding the acceptance or rejection of the project.

Background

Diamond Chemicals was one of the early dominant players in the propylene production market, they had two plants with a combined annual output of 500,000 metric tons. The company was struggling to keep up its financial performance amidst the on-going worldwide economic slowdown, and had already seen a 50% fall in earnings per share from the previous year. Lucy Morris, newly appointed plant manager in Merseyside plant, found the need for a plant modernization project. The project required capital funding approval from corporate headquarters. It was a challenge because the company was under pressure from investors to improve financial performance. So, in this scenario, Morris had to propose a capital project that can save Diamond Chemical in such an embarrassed condition.