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    Victoria Chemicals Part 1

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    cesarvirata
    Victoria Chemicals is one of the leading producers of Polypropylene, a polymer that is used in many products ranging from carpet fibers, automobile components, packaging film and more.

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    Victoria Chemicals Part 1

    Uploaded by

    cesarvirata
    307 views2 pages
    Victoria Chemicals is one of the leading producers of Polypropylene, a polymer that is used in many products ranging from carpet fibers, automobile components, packaging film and more.

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    © © All Rights Reserved

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    Victoria Chemicals is one of the leading producers of Polypropylene, a polymer that is used in many products ranging from carpet fibers, automobile components, packaging film and more.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    307 views2 pages

    Victoria Chemicals Part 1

    Uploaded by

    cesarvirata
    Victoria Chemicals is one of the leading producers of Polypropylene, a polymer that is used in many products ranging from carpet fibers, automobile components, packaging film and more.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    I.

    Introduction
    Victoria Chemicals is one of the leading producers of Polypropylene, a polymer that is
    used in many products ranging from carpet fibers, automobile components, packaging film and
    more. When Victoria Chemicals started up in 1967 they built two plants, one in Merseyside,
    England and one in Rotterdam, Holland. Both plants were identical to each other and produced
    an equal amount of goods. Morris Greystock, the controller of the Merseyside plant had notice a
    decline in the stock price from 250 pence per share in 2006 to 180 pence per share in 2007 and
    knew he had to do something. Facing pressure from the investors and wanting to increase
    production efficiency, he decided to renovate the Merseyside plant so Victoria Chemicals can lift
    itself back to where it once was and continue to be one of the major competitors in the
    worldwide chemical industry. After taking all the costs and benefits into consideration,
    Greystock put together his own analysis in which he based it on four different components;
    Earning per Share, Payback Period, Net Present Value, and Internal rate of return. Soon after
    many people looked at his analysis they had several questions and suggestions to give to
    Greystock. We will see soon enough that Greystocks Analysis had many flaws that needed to be
    fixed and how it really should have been done.
    II. Victoria Chemicals and its Capital Expenditures
    Victoria Chemicals incorporated four different types of methods to determine its capital
    budgeting proposed projects. They include Earnings per Share (EPS), Pay Back Period (PBP),
    NPV, and the Internal Rate of Return (IRR). Of the four methods, the two favorable to use for
    evaluation would be NPV and IRR while the EPS and PBP would be less favorable to use
    because of its evaluation process. Using NPV is a good method to use to evaluate the project
    because it takes in account for all the costs relevant to the project and includes all the cash flow
    of the project as seen on exhibit 1. We would also include the IRR because of the beneficial
    picture that it creates. However, there can be a complication if two scenarios arise. The first
    complication can be realized when there is a negative Cash Flow other than the initial year of the
    implementation of the project and dealing with a mutually exclusive project. Neither one of
    these scenarios occur for the proposed Victoria Chemicals project. The payback period and EPS
    are not used in the final determination of accepting the project because of their shortfalls. When
    using EPS to evaluate a project it will be more biased towards shorter term project. This is
    because EPS focuses on the current cash flows instead of the direct cash flows. The reason why
    Pay Back Period isnt a determining factor in accepting a project is because it doesnt take into
    consideration the time value of money and also ignores any Cash Flow that occurs after the
    payback period has been reached.
    III. Transportation Division Dispute
    The Transport Division suggestion is that the tank car purchases should be included in the
    initial outlay because the increased output will exhaust the capacity of the current tank cars and

    thus will make the company purchase them in year 2010 instead of 2012. This shift in time will
    alter the timing of the cash flows and will have a direct affect on the incremental depreciation as
    seen on exhibit 1. While Greystock argues that it shouldnt be included because it will initially
    use the excess capacity of the Transport Division.

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