Possible Solution

In this case we seek to find out if undertaking the capital program to improve productions at
Merseyside will improve the financial performance of Victoria Chemicals. We are also trying to
address the concerns of the various departments and staff. We also need to find out what changes
should be made to the proposal.

Analysis of solutions
Firstly I believe the discount rate should be adjusted. I used the 7% discount rate which was
deemed more accurate. I also accounted for a 3% inflation premium and added the $ 2 million
cost for tank cars to the initial outlay. Exhibit 2 shows the revised discounted cash flow.
The expected Net Present value of this project using the revised discount rate and premium is
GBP17.42 million. NPV gives explicit consideration to the time value of money and is a good
method to evaluate the project because it assesses all the cost involved. When the NPV of the
project is greater than zero, then the firm can believe that this is an acceptable project. This new
NPV shows that the project is a great investment. If they were to account for full erosion of
Rotterdams business volume, there would still be a positive NPV for Merseyside and above the
hurdle rate.
The new IRR is 23% and this holds the project at an 11% higher rate than minimally expected
for a project. This IRR represents the project in a positive light. Because the project requires the
plant be closed for 45 days, Victoria Chemicals would likely experience a 11% decrease in

production for that year upon implementing the project. The 11% figure was determined using
the following equation where 1.5 (months) equals 45 days in which the plant would be shut
down for construction. 250000/14*1.5= 26785.71/250000= 0.1071= 11%
The reporting structures and bonus programs is seen as a violation of ethics. Having the
Transport Division and the Intermediate Chemicals Group reporting to separate executive vice
presidents is a problem. An ethical dilemma arises when Tewitt asks Greystock to add his
renovation project as part of the polypropylene line renovations when he stated that in the last
20 years, no one from corporate has monitored renovation projects once the investment decision
is made. I think that they should divest this department, and try to develop new technology
products and find new opportunities in this industry.
Summary and conclusions
There is no doubt that Victoria Chemicals needs to take measures to improve its financial
performance. Their competitors are outperforming them because their plant requires higher labor
content and higher costs than the competitors new plants. As seen in Exhibit 1, there was only
one major competitor who had higher production costs than Victoria Chemicals. The reasoning
would be that they also had an out of age plant. The proposed project will most likely increase
productivity, efficiency and increase sales when the market turns around. The analysis shows that
this project is beneficial to Victoria Chemicals, and they should implement it. The addition to
Earning per share, the positive NPV, and the acceptable IRR are all reasons that lead us to
believe this capital program will be successful.
Recommendations and plan of implementation

I believe that Morris should continue to promote the project for funding and Victoria Chemicals
should go forward with the proposed capital program. One of the alternatives they could consider
is conducting improvements in increments to avoid shutting down the plant entirely. By
continuing operations and going along with the project, they will less likely lose customers to
competitors. The director of sales states that the polypropylene market is highly competitive,
therefore, any loss in customers would be injurious to the company. When the recession ends the
company is likely to increase its market share and will be in a better financial position.
I recommend that Victoria chemicals should not tie managers bonuses with the size of the plant.
A manager could easily grow a plant for the sole purpose of obtaining a bonus but this may not
be best for the company. It may be more efficient for the firm to use straight-line depreciation as
opposed to the double declining balance method to control the loss in revenue.