Diamond Chemicals Plc(a) : The Merseyside Project

UCONN School of Business

OPIM 5668 Case Study

Diamond Chemicals PLC (A): The Merseyside Project

Submitted By: Group 7

Harshvardhan Reddy

Yingxin Zhang

Navjot Singh

Yi Chen

Table of Contents

Executive Summary:        

Statement of the Problem:        

Background:        

Methodology:        

Results:        

Identification of Relevant Cash Flows        

Sunk Costs        

Cash flows obtained by cannibalizing another activity within the firm        

Exploitation of excess transportation capacity        

Overhead:        

Cash flows of unrelated projects        

Inflation        

Changes Required in DCF        

Morris’s Answers for different Departments        

Transport Division        

Director of Sales        

Assistant plant manager        

Analyst from the Treasury Staff        

Attractiveness of Merseyside Project        

Conclusions and recommendations        

Appendix        

References        

Executive Summary

Diamond Chemicals is a chemical company whose major product is polypropylene. Its major market areas are Europe and Middle East. Company has two plants at Merseyside, England and Rotterdam, Holland. The two plants are identical and are set in 1967. Because of the recent economic downturn the company came under pressure from investors to improve the financial performance.

The project under study brought up by Morris the plant manager at Diamond Chemical is an engineering efficiency project. According to the initial project details, the proposed project has an expenditure of $9 million and shutdown period of 45 days for the work to take place. It is supposed to increase the through output by %7 and increase the gross profit margin from 11.5% to 12.5% and also lower energy requirement which comes under savings. The initial project evaluation reports the EPS as $0.018, payback period as 3.6 years, NPV 9MM and IRR as 25.9%. It cleared all the four hurdles to pass through the corporate vote.