Executive Summary

American Chemical Corporations Collinsville plant in Alabama is being sought by Dixon a

speciality chemicals company. This plant mainly specialises in Sodium Chlorate production
and fits well with Dixons strategy of supplying chemicals to paper and pulp industry. It
would also complement Dixons existing product line. The plant costs $12million in
investment and requires up to$ 2.25 million for upgrading to new technology.
An in-depth investigation and analysis is conducted for both the company and the industry
to accurately determine the worth of investment in the Collinsville plant. Net present values
are calculated for all possible scenarios. After a thorough analysis of the data, suitable
recommendations are provided.

Table of Contents
Executive Summary................................................................................................................................. 1
Introduction ............................................................................................................................................ 3
About The Collinsville Plant .................................................................................................................... 3
Sodium Chlorate Market in USA ............................................................................................................. 3
Issues surrounding Collinsville opportunity ............................................................................................ 4
Valuation ................................................................................................................................................. 4
Using NPV Rule for the project Without Laminated Electrodes ...................................................... 5
Using NPV Rule for the project With Laminated Electrodes ............................................................ 5
Calculations of Beta ............................................................................................................................ 6
Debt/Equity ratio ................................................................................................................................ 6
Monte Carlo Analysis .......................................................................................................................... 6
For the Unlaminated factory............................................................................................................... 6
Recommendations .............................................................................................................................. 7
Exhibits .................................................................................................................................................... 8
Exhibit 1: Using NPV Rule for the project Without Laminated Electrodes (Full Table) ................... 8
Exhibit 2: Using NPV Rule for the project With Laminated Electrodes (Full Table) ......................... 9

Introduction
Dixon, an American specialty chemical producer, wants to buy Collinsville plant from
American Chemical Corporation, another typical chemical company in 1979. Dixon wants to
diversify its product line by acquiring the aforesaid plant, which produces sodiumchlorate to
supply to paper producers in South-eastern part of the US. This plant initially cost USD 12
million and additional USD 2.25 million needed to buy laminate technology to increase
efficiency and profitability of the plant in order.

About The Collinsville Plant

American Chemical Corporations plant in Collinsville had the capacity to produce 40000
tons of sodium chlorate per year. Sodium chlorate is produced via the electrolytic
decomposition of salt, water and energy. The important factors for us to consider regarding
sodium chlorate is where the demand for this chemical comes from. 85% of demand for the
product is derived from the paper and pulp industry, where it is used in the production of
the bleach that is used to whiten the paper. The remaining 15% comes from its use as a soil
sterilant, in uranium mining and in the production of other chemicals.

Sodium Chlorate Market in USA

Bargaining Power of Customers
Competition within Industry
Customers include Paper & Pulp
Highly Competitive Market
Producing Companies like Georgia
Market
Leaders
like
Hooker,
Pacific and Universal
Pennwalt, American & Kerr-McGee
Because of high competition among
have more than 55% of the US
the sodium chlorate producers, the
Market
bargaining power is being increased.
Huge number of small medium
The demand is also increasing at the
enterprises with active shares in the
rate of 8 to 10% per year with extra
sodium chlorate market in US
usage in the plant effluent problems
Paper Companies like Universal also
of paper corporations.
have their own NaClO3 plants actively
participating in the competition.
Companies like Brunswick and
Southern are specialised only in
NaClO3 production

Threat of New Entrants

Threat of Substitutes
Union Chemicals and Lousiana Paper
Graphite Rods used in the production
Company have already announced
of NaClO3 are being replaced with
their entry into the competition with
Metal or Laminate rods.
40000 and 35000 tons plants
This would eliminate graphite costs
respectively
and also reduce power costs by
approx. 30%

Issues surrounding Collinsville opportunity

1. Impact on revenues: Reduction in margins due to overcapacity: Although sodium
chlorate prices were expected to increase, the overcapacity would cause number of
tons to reduce (competition) and therefore, hit the margins.
2. Impact on costs: Increase of electricity from $0.019 in 1977 per kWh to $0.025 per
kWh in 1979. Besides, due to upward revaluation of assets, depreciation was
expected to increase.
3. Impact from adoption of technology: Depreciation would increase and Dixon was
required to pay all costs related to the installation of laminated electrodes.
4. Impact of Financing of acquisition: Temporarily increase Debt to capital ratio to 47%.
Target debt to capital ratio: 35%

Valuation
The Next important step is the valuation of sodium chlorate plant i.e. Collinsville Plant for
Dixon Company.
The given values and assumptions are summarised in the following tables:

Given

Assumptions
(Without Laminate)

Assumptions

Sales
Price of NaClO3
Power
Graphite Cost

Remains same
Increased by 8% per year
Increased by 12% per year
Increased by 5% per year

Salt and Other Costs

Increased by 6.45% per year

Labour Cost

Increased by 10% per year

Maintenance Costs

Increased by 8.4% per year

Other Costs

Remains same

Selling Charges

Increased by 11% per year

R&D Costs

Increased by 7% per year

Depreciation

Increased by 4.6% per year

Graphite Cost

Nil

(With Laminate)

Power Costs
Other Costs

Decreased by 20% from graphite rod

plants
Remains same

Target Debt to Capital 0.35

Ratio
Rf
9.5
Key parameters

Rm - Rf

8.5

Rd

11.25

Re

20.6945

WACC

15.498925

Using NPV Rule for the project Without Laminated Electrodes

EBIT after tax
433.16 1153.36 1578.2 1629.68 1573.52 1537.157
Capital Expenditure
500
500
500
500
500
500
Depriciation
1060
1110
1160
1210
1270 1328.42
Net working capital
-204
316
266
144
150 177.618
FCFF
1197.16 1447.36 1972.2 2195.68 2193.52 2187.959
PV
1036.5919 1085.145 1280.318 1234.217 1067.627 922.0893

NPV

1469.926
500
1389.527
193.0962
2166.357
790.5317

1365.214
500
1453.446
209.9449
2108.715
666.2892

1216.009
500
1520.304
228.2873
2008.026
549.3763

1014.248
500
1590.238
248.2579
1856.229
439.7316

-89.2734

[Details of the expected values is given in Exhibit 1

As the table is clearly indicating the net present value is a negative value if the Collinsville
Plant is valued assuming that the graphite rods are not substituted with the laminate ones.
This project may not be profitable considering this negative value.

Using NPV Rule for the project With Laminated Electrodes

EBIT after tax
Capital Expenditure
Depriciation
New Depriciation
Net working capital
FCFF
PV

1123.096 2252.12 2892.344 3096.184 3197.48 3333.924 3458.43 3566.569 3653.766 3714.686
500
500
500
500
500
500
500
500
500
500
1060
1110
1160
1210
1270 1328.42 1389.527 1453.446 1520.304 1590.238
1285
1335
1385
1435
1495 1553.42 1614.527 1678.446 1745.304 1815.238
-204
316
266
144
150 177.618 193.0962 209.9449 228.2873 248.2579
2112.096 2771.12 3511.344 3887.184 4042.48 4209.726 4379.861 4535.069 4670.783 4781.666
1828.813 2077.622 2279.503 2185.031 1967.551 1774.139 1598.268 1432.943 1277.881 1132.753

NPV

12867.3

[Details of the expected values is given in Exhibit 2]

For calculating the NPV of project in case of Laminated Electrodes, the power costs are
reduced by 20%. The Graphite costs are taken as zero since there is no utilisation of graphite

in the newer technology. Also the capital expenditures for first year are taken as 2.5 million
$(the cost of project). Now, the NaClO3 plant in Collinsville is valued using discounted cash
flow assuming the plant would operate using new replaced laminate electrodes when they
become available. In this project, it is founded out that the Net present value is positive
suggesting the project is profitable if $2.25mn of laminate electrodes is included in the
overall $12mn deal.

Calculations of Beta
The systematic risk of the project could be the risk of the production of sodium chlorate in
the industry. Therefore, we calculate beta of the project based on the beta of the sodium
chlorate industry.
The beta of Brunswick and Southern will be used to calculate the Beta un-leverd for the firm
because the two firms purely produce sodium chlorate. Their Beta will be first unlevered.
Then weighted average of those un-levered Betas will be used to calculate the levered beta
of the firm.

Debt/Equity ratio
For calculating levered Beta we take Dixons target capital structure (D/E ratio of 35%).
Financing by the debt package will temporarily increase Dixons D/E ratio to .47. But we take
.35 as the D/E ratio for calculation as the company will ensure that it maintains its target
D/E ratio in the long run.

Monte Carlo Analysis

Monte Carlo analysis is used to gauge the sensitivity of free cash flows on the Net present
value of the project. This is used to simulate various sources of uncertainty inherent in the
cash flows. Monte Carlo Analysis is performed on both the relevant scenarios in the case
and the variations are plotted in a graph.

For the Unlaminated factory

Cumulative Probability

RiskSim 2.42 Trial for Evaluation - Cumulative Chart

1.0
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
-4500

-4000

-3500

-3000

-2500

-2000

-1500

-1000

-500

NPV

After installing lamination

1.0

RiskSim 2.42 Trial for Evaluation - Cumulative Chart

Cumulative Probability

0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
-20000

-10000

10000

20000

30000

40000

50000

60000

70000

NPV

Recommendations
Basing on our detailed calculations following recommendations are made to Dixon
Corporation
The net present value (NPV) of Collinsville plant (without the lamination technology)
comes out as -0.89 million. Since the NPV value is negative it is advisable not invest
in this project and company should pursue other alternatives.
If the new Lamination technology is installed in the Collinsville plant then the Net
present value comes out as $10.919 million. This is attributed mainly to the huge
savings in power and graphite costs. Even though it requires a $2.5 million extra
investment, the benefits far outweigh the costs. Because of a high NPV value it is
advisable to invest in the Collinsville plant and install the lamination technology. This
investment will not only create synergies because of the similarity in the business
but also add value to shareholders wealth.
If terminal values are taken as zero (assuming no residual value)then the NPV of
Collinsville plant comes out as -$2.928 million. And after installation of lamination
the NPV becomes as 3.6 million $. Because of the high NPV value in the later
scenario it is advisable to implement advanced Lamination technology while
investing in Collinsville plant.

Exhibits
Exhibit 1: Using NPV Rule for the project Without Laminated Electrodes (Full
Table)

Revenues
Sales(tons)
Avg price
Sales
Manufacturing costs
Power
Graphite
Salt and other
Total Variable Costs
Fixed Costs
Labor
Maintenance
Other
Total Fixed
Total Manufacturing Costs
Other Charges
Selling
R&D
Depriciation
Total
Total costs

1
1980

2
1981

3
1982

4
1983

5
1984

6
1985

7
1986

8
1987

32000
415
13280

35000
480
16800

38000
520
19760

38000
562
21356

38000
38000
38000
38000
38000
38000
606
654.48 706.8384 763.3855 824.4563 890.4128
23028 24870.24 26859.86 29008.65 31329.34 33835.69

6304
645
1285
8234

7735
791
1621
10147

9386
875
1753
12014

10526
940
1836
13302

11780 13193.6 14776.83

992
1041.6 1093.68
1956 2082.162 2216.461
14728 16317.36 18086.97

1180
256
1154
2590

1297
277
1148
2722

1427
299
1179
2905

1580
322
1113
3015

10824

12869

14919

16317

17973

112
451
1060
1623

125
478
1110
1713

138
508
1160
1806

152
543
1210
1905

168
591
1270
2029

12447

14582

16725

18222

16550.05
1148.364
2359.423
20057.84

9
1988

18536.06
1205.782
2511.606
22253.45

10
1989

20760.39
1266.071
2673.605
24700.06

1738
1911.8 2102.98 2313.278 2544.606 2799.066
354 383.736 415.9698 450.9113 488.7878 529.846
1153
1154
1154
1154
1154
1154
3245 3449.536 3672.95 3918.189 4187.394 4482.912
19766.9 21759.92 23976.03 26440.84 29182.97

186.48
632.37
1328.42
2147.27

206.9928 229.762 255.0358 283.0898

676.6359 724.0004 774.6804 828.9081
1389.527 1453.446 1520.304 1590.238
2273.156 2407.208 2550.02 2702.236

20002 21914.17 24033.08 26383.24 28990.86 31885.21

Operating profit
EBIT after tax
Capital Expenditure
Depriciation
Net working capital
FCFF
PV

833
2218
3035
3134
3026
433.16 1153.36
1578.2 1629.68 1573.52
500
500
500
500
500
1060
1110
1160
1210
1270
-204
316
266
144
150
1197.16 1447.36
1972.2 2195.68 2193.52
1036.592 1085.145 1280.318 1234.217 1067.627

NPV

-89.273

2956.072
1537.157
500
1328.42
177.618
2187.959
922.0893

2826.78
1469.926
500
1389.527
193.0962
2166.357
790.5317

2625.412
1365.214
500
1453.446
209.9449
2108.715
666.2892

2338.48
1216.009
500
1520.304
228.2873
2008.026
549.3763

1950.478
1014.248
500
1590.238
248.2579
1856.229
439.7316

Exhibit 2: Using NPV Rule for the project With Laminated Electrodes (Full Table)
1
1980

2
1981

3
1982

4
1983

5
1984

6
1985

7
1986

8
1987

9
1988

10
1989

Revenues
Sales(tons)
Avg price
Sales
Manufacturing costs
Power
New power
Graphite
Salt and other
Total Variable Costs
Fixed
Labor
Maintenance
Other
Total Fixed

32000
415
13280

35000
480
16800

38000
520
19760

38000
562
21356

6304
5043.2
354
1285
6682.2

7735
6188
0
1621
7809

9386
7508.8
0
1753
9261.8

10526
8420.8
0
1836
10256.8

1180
256
1154
2590

1297
277
1148
2722

1427
299
1179
2905

1580
322
1113
3015

1738
1911.8 2102.98 2313.278 2544.606 2799.066
354 383.736 415.9698 450.9113 488.7878 529.846
1153
1154
1154
1154
1154
1154
3245 3449.536 3672.95 3918.189 4187.394 4482.912

Total Manufacturing Costs

9272.2

10531

12166.8

13271.8

14625 16086.58 17710.88 19517.65 21527.85 23764.83

112
451
1285
1848

125
478
1335
1938

138
508
1385
2031

152
543
1435
2130

11120.2

12469

14197.8

15401.8

Other charges
Selling
R&D
New Depriciation
Total
Total costs

38000
38000
38000
38000
38000
38000
606
654.48 706.8384 763.3855 824.4563 890.4128
23028 24870.24 26859.86 29008.65 31329.34 33835.69
11780 13193.6 14776.83 16550.05
9424 10554.88 11821.47 13240.04
0
0
0
0
1956 2082.162 2216.461 2359.423
11380 12637.04 14037.93 15599.46

168
591
1495
2254

186.48
632.37
1553.42
2372.27

18536.06
14828.85
0
2511.606
17340.45

20760.39
16608.31
0
2673.605
19281.91

206.9928 229.762 255.0358 283.0898

676.6359 724.0004 774.6804 828.9081
1614.527 1678.446 1745.304 1815.238
2498.156 2632.208 2775.02 2927.236

16879 18458.85 20209.03 22149.86 24302.87 26692.06

Operating profit
EBIT after tax
Capital Expenditure
Depriciation
New Depriciation
Net working capital
FCFF
PV

2159.8
4331
5562.2
5954.2
6149
1123.096 2252.12 2892.344 3096.184 3197.48
500
500
500
500
500
1060
1110
1160
1210
1270
1285
1335
1385
1435
1495
-204
316
266
144
150
2112.096 2771.12 3511.344 3887.184 4042.48
1828.813 2077.622 2279.503 2185.031 1967.551

NPV

12867.3

6411.392
3333.924
500
1328.42
1553.42
177.618
4209.726
1774.139

6650.826
3458.43
500
1389.527
1614.527
193.0962
4379.861
1598.268

6858.786
3566.569
500
1453.446
1678.446
209.9449
4535.069
1432.943

7026.473
3653.766
500
1520.304
1745.304
228.2873
4670.783
1277.881

7143.626
3714.686
500
1590.238
1815.238
248.2579
4781.666
1132.753