Diamond Chemicals

1. EXECUTIVE SUMMARY:

Diamond Chemicals is major competitor in worldwide chemical industry and a leading producer of polypropylene. The report provides a detailed analysis of aCapital budgeting project proposed to the Senior Management of Diamond Chemicals.However, there are some problems such as unrelated cash flow, market cannibalization, discount rate has raised from several major departments in the factory. All these problems needs to be fixed before concluding whether the project should be taken forward for funding.

Methods of analysis includes the calculation of net present value (NPV),Internal rate of return(IRR),impact on earnings per share(EPS)and payback period.The results provide a better NPV,payback period and EPS values. As an end result, the project should be taken forward for funding as the evaluations indicate that the project is beneficial to Diamond Chemicals. However, there are some recommendations to Diamond Chemicals to improve their product output based on Greystock’s report:

• Include the £2 million cost of tank car purchase as the capital expenditure of Merseyside’s project

• Include the potential loss of business for a shutdown of 45 days

• Targeted rate of return should include inflation into consideration

• Exclude the sunk costs of £ .5 million preliminary engineering costs

These recommendations are only for the proposed problem under the current circumstances. However, if the description changes then we will need further analysis for funding.

2. STATEMENT OF PROBLEM:

The Diamond Chemical PLC has good reputation in the market with respect to their product quality and their efficiency level. Recently, Diamond Chemicals has been facing the problem of low profitability. In order to face the current issues and to increase the revenue, Diamond Chemicals has decided to go on the part of expansion side which would more beneficial for them. Morris proposed a project expenditure of £9 million which intended to:

• Renovate and rationalize a production line at Merseyside

• Make up for deferred maintenance and increase production efficiency

However before funding the project, we should determine whether the project will be beneficial to Diamond Chemicals. There are some key issues which came into play:

• The assistant plant manager wants the controller to include an EPC project as a part of the overall project

• The project would require the parent company’s Transport Division to invest 2 mn pounds which the controller refuses to add in her own project’s outlay

• Treasury analyst