Premium Essay

Diamond Chemical Case

In: Business and Management

Submitted By abhisheksinghdae
Words 269
Pages 2
1. What changes, if any, should Lucy Morris ask Frank Greystock to make in his discounted cash flow (DCF) analysis? Why? What should Morris be prepared to say to the Transport Division, Director of Sales, her assistant plant manager and the analyst from the Treasury Staff?
• In DCF analysis if Merseyside Project done by Greystock, inflation rate is assumed to be 0%, which is not the case in practice. Treasury staff showed concerns that long-term inflation should be 3%.
• Since preliminary engineering costs are sunk costs, it should not be deducted as expenses.
• Proposed expenditure is 9m which is not changed as to 11m. 2m expense of transport department is not included.
Replies to:
• Transport Division: Expense of 2m should not be added in this analysis because it should be incurred by the concerned division in line with the policy, that the expenditure of respective division’s expenditure are independent of each other as this division is not a part of the group.
• Sales Department: This product is prices as commodity. There are concerns of oversupply but Greystock stated that company doesn’t have to bear the additional charges. This will steal the competitor’s share rather than the cannibalization, as it is prices as commodity.
• Assistant plant manager: EPC renovation was rejected on the economic grounds but it ignores the strategic advantage after recession ends. The proposed renovation should be in the capital program of Morris for the strategic advantages.
• Treasury staff: Inflation rate was assumed to be 0% in original analysis. Treasury staff suggested that long-term inflation should be 3%, which should be considered in DCF…...

Similar Documents

Premium Essay

Diamond Chemicals

...Teletech Case After careful review of the Teletech case I think that Rick Phillips thought on the method to calculate hurdle rate or WACC is the most aligned with industry standards and would be the most financially beneficial to the company overall. The current method that Teletech Corporation is using for hurdle rate is an overall average for the company; all segments combined using an averaged beta for the company, regardless of the risk of each division. If the companies risk level was very similar for each division this would be an appropriate method per industry standards, but due to the varying risk with each division the hurdle rate should be calculated separately for each division and financial decisions for capital investment based upon these hurdle rates. If you break the hurdle rates out for each division it shows that the Services division has a hurdle rate of 8.8%, using market value available date and the Products and Systems division has a hurdle rate of 10.4%, using market value data of similar risk companies. Comparing these to the averaged company hurdle rate of 9.3% shows that the services division’s capital projects would bring a higher rate of return to the company than the P&S divisions; even though this would not be seen if you were only looking at an average. The P&S division projects could actually have negative returns based on the division hurdle rates. This is what Rick Phillips was trying to express by presenting his graph of......

Words: 588 - Pages: 3

Premium Essay

Cape Chemical Case

...Case: Cape Chemical Case summation Even though sales has grown to double digits ,Cape Chemical has acquired more debt by acquiring more land, storage space, increasing the size of the work force and expanding capacity. By adding “next day delivery” option , Cape Chemical Inventory cost will increase substantially. The company focuses on expanding by coming up with new ideas such as new product lines. The new lines and new feature will attract customers but in the long run if they are not able to manage cash flow ,the company will soon go bankrupt. Another problem with their cash flow is being very lenient to the credit policy. Although there is a record of double digit sales growth , it does not mean that Cape Chemical will and has received any cash/payment. The company has also reached its bank-borrowing limit at the end of 2006, and also acquired an additional $3,000,000 in long-term borrowings by borrowing against the company’s fixed assets. An extra $1,000,000 was incurred after asking for a loan extension from the bank in 2007. The bank has refused to grant additional loans. Stewart continues to focus on just marketing and R&D. She has been attempting to acquire an attractive specialty chemical product line. This line will require a total investment of $4,200,000 in new financing. Historal Data The variable costs shows it is stable to sales ; 89% of sales are variable costs. This means that the company operates on low margins. In the last three......

Words: 1071 - Pages: 5

Premium Essay

Soren Chemical Case Analysis

...SOREN CHEMICAL CASE ANALYSIS INTRODUCTION Case is about the company Soren Chemical and marketing swimming pool clarifies to the B2C market. Initially this company was in B2B. The B2B pool clarifier names Kailan MW and it is sold to Commercial Pools and Water Parks. Kailan MW has USPs like: 1. Attacks organic contaminants which can escape conventional filters 2. Larger effective period 3. Lower quantity required In September 2006, Soren Chemical had launched Coracle, a new water clarifier for B2C. This product has the same USPs like a Kailan MW. Soren was inexperienced, because B2C has big differences than B2B. Eventually, they totally failed, because of a lot of strategic and tactical problems. Strategic problems 1. Their expectations were more than actions. The target was 50,000 gallons for the first year of sales. But through the first half of the selling season for pool chemicals, Soren had sold just 3,725 gallons. They were inexperienced in B2C business and did not do well enough promotion company. 2. Go-to-market strategy. The selling season for residential pool chemicals starts in spring. Soren started in May, when most pool owners have already bought another product. If Moritz identified the problem, she could salvage 2007 and position Coracle for a successful second year. Tactical problems In my opinion, the main problem is Soren Chemical did not have enough experience for begin this new business. As a result, they had a lot of......

Words: 640 - Pages: 3

Premium Essay

Diamond Chemicals

...Diamond Chemicals: Merseyside and Rotterdam Project Investment decision analysis Group Name- fInatics Group Members- 1. Nishant Kumar (MP13037) 2. Rahul Naredi (MP13039) 3. Samardarshi Sarkar (MP13046) 4. Shadab Akhtar (MP13050) Summary About the case Diamond Chemicals is a leading producer of polypropylene, the polymer used in a variety of products (ranging from medical products to packaging film, carpet fibers, and automotive components) and is known for its strength and elasticity. Diamond Chemicals is producing polypropylene at Merseyside, England and in Rotterdam, the Netherlands. Both factories are identical in size, age, and plant design. Merseyside is a factory built in 1967. Merseyside production process is the production process that are old, the best semi-continuous, and therefore has a total workforce of more than the other plant competitors. Diamond Chemicals is under pressure from investors to improve the financial performance due to economic slowdown worldwide and also the accumulation of common stock of the company. Revenue per share has fallen to 30 Euros at the end of 2000 from around 60 Euros at the end of 1999. Original Assumptions |   |   | Suggested Assumptions |   | Annual Output | 250000 |   | Annual Output | 250000 | Output Gain/Original Output | 7% |   | Output Gain/Original Output | 7% | Price/ton (Pounds Sterling) | 541 |   | Price/ton (Pounds Sterling) | 541 | Inflation rate (Prices and costs) | 0% |   |......

Words: 636 - Pages: 3

Premium Essay

Chemical Diamond

...------------------------------------------------- Diamond Chemicals: The Merseyside and Rotterdam Projects Valuation and Recommendation | Table of Contents Executive Summary2 Problem Statement & Issues3 Analysis of Merseyside & Rotterdam3 The Merseyside Proposal & Analysis3 Static NPV4 Option to Switch to Japanese or German Technology4 The Rotterdam Proposal & Analysis5 Static NPV5 Option to Switch to German Technology5 Qualitative Considerations6 Recommendation7 Appendix I – Black-Scholes Model for Japanese Option8 Appendix II – Merseyside Margrabe Model for German Option8 Appendix III – Merseyside Assumptions9 Appendix IV – Merseyside Discounted Cash Flow Analysis9 Appendix V – Merseyside Depreciation Schedule10 Appendix VI – Merseyside Sensitivity Analysis11 Appendix VII – Rotterdam Margrabe Model for German Option12 Appendix VIII – Rotterdam Assumptions12 Appendix IX – Rotterdam Discounted Cash Flow Analysis13 Appendix X – Eustace’s Margin Growth Rate Error13 Appendix XI – Rotterdam Depreciation Schedule14 Appendix XII – Free Cash Flow Comparison Graph14 Executive Summary: Due to Diamond Chemical’s recent poor financial performance, it is seeking to upgrade the Merseyside plant or Rotterdam plant in order to improve performance and create value for its shareholders. The upgrade of the Merseyside plant will require a capital expenditure of £9.0 million and will increase polypropylene output by 7.0%, and increase gross margin from 11.5%......

Words: 2385 - Pages: 10

Premium Essay

Diamond Chemicals

...Diamond Chemicals PLC Executive Summary Diamond Chemicals is considering two mutually exclusive projects, the Merseyside project and the Rotterdam project, for the production of polypropylene When considering the Merseyside project, senior-management wants a positive impact on earnings per share. The addition to earnings per share was £28,800 with an average addition of £2,000 per year2. Calculated with erosion, the addition to earnings per share was £18,800 with an average addition of £1,100 per year2. The payback period for the project was 3.10 years, when considering the erosion of Rotterdam, this would increase to 3.46 years2. The net present value of Merseyside is £15.61 million and when considering erosion, the net present value is £11.37 million2. The internal rate of return is 33%, with the erosion, it is 28.2%2. Based on these four criteria, Merseyside is a valid project to consider. When considering the Rotterdam project, the effect on earnings per share was £6,000 with an average addition of £2,100 per year4. With the erosion of Merseyside, the earnings per share would be -£2,700 with an average addition of £1,200 per year4. The payback period of the Rotterdam project would be 13.68 years and with erosion, it would be 14.24 years4. The net present value is -£3.24 million and when considering erosion, it was -£6.61 million4. The internal rate of return is 8.04% and with erosion 5.91%4. The Rotterdam project does not meet the criteria due to a......

Words: 1780 - Pages: 8

Free Essay

Dow Chemical Case

...Case Brief Internal Entrepreneurship at Dow Chemical Description With the 2001 merger with Union Carbide, Dow Chemical Company became the largest chemicals and Plastics Company in the world. The merged company had sales of $27.8 billion specializing in chemical, plastic and agricultural products. Prior to the merger, growth had become a priority for Dow Chemical. In the years prior to 2000, the firm’s turnover dropped from $20 billion to $18.4 billion as the Net profit margin eroded to 7.1% from 10.3%. The e-epoxy.com venture was one of the many new growth initiatives Dow Chemical launched to bolster growth during this period. E-epoxy.com was conceived by Ian Telford to target the underserved market of small customers that are cost conscious. Evaluation EP&I Division: The epoxy business is a high margin but also highly capital-intensive business for Dow chemical. With 20% of the customers generating 80% of the division’s revenue and the cyclical nature of the epoxy market, the business is very susceptible to downturns. The concentration of revenues from a few customers would intuitively put customers in a position of strength during price negotiations; however Dow Chemical did not disclose prices charged to other customers. Dow Chemical maintained relationships with key clients by providing value added services (integrated supply chain, technical assistance, and volume rebates). The added services were necessary to differentiate Dow’s product. With highly...

Words: 897 - Pages: 4

Premium Essay

Diamond Food Case

...ISSUES IN ACCOUNTING EDUCATION Vol. 30, No. 1 2015 pp. 47–69 American Accounting Association DOI: 10.2308/iace-50948 Diamond Foods, Inc.: Anatomy and Motivations of Earnings Manipulation Mahendra R. Gujarathi ABSTRACT: Diamond Foods is America’s largest walnut processor specializing in processing, marketing, and distributing nuts and snack products. This real-world case presents financial reporting issues around the commodities cost shifting strategy used by Diamond’s management to falsify earnings. By delaying the recognition of a portion of the cost of walnuts acquired into later accounting periods, Diamond Foods materially underreported the cost of sales and overstated earnings in fiscal 2010 and 2011. The primary learning goal of the case is to help students understand the anatomy and motivations of earnings manipulation. Specifically, students will have the opportunity to (1) apply the FASB’s Conceptual Framework to a real-world context, (2) determine the nature of errors and compute their numerical effects on financial statements, (3) understand motivations for earnings management and actions needed for managing earnings of future years, (4) explain the anatomy of financial reporting fraud by reconstructing journal entries, (5) prepare comparative financial statements for retroactive restatements, (6) explain the rationale for clawback provisions in compensation contracts, and (7) understand the difference between the real and accrual-based earnings management.......

Words: 6598 - Pages: 27

Premium Essay

Conflict Diamonds Case

...328 Conflict Diamond Case Study Raw diamonds are making their way from deadly jungles to hands and necks all around the world. It is unfortunate that these resources from third world countries are being exploited for the sake of vanity. Diamonds are not just a symbol of love anymore but are also becoming a symbol of mutilated body parts and crisis. While lives are being taken and children are being exploited, there are fortunes being made by transnational corporations. All the while these poor African people working in the mines under horrendous conditions are only getting paid maybe a dollar a day. As long as there is wealth to be made this crisis may never come to an end. So, a question arises as to who are the key players and how can they help stop conflict diamonds or even worse, how are they contributing. There may very well be those that are trying to help stop conflict diamonds such as the World Diamond Council, United Nations and possibly others such as reporters just like we see in the movie ‘Blood Diamond.’ However, it is almost clear that all other stakeholders are only contributing. For example, Multinational Enterprises it seems only care about the huge profits they make and perhaps look the other way in order to have middle men working to smuggle these diamonds and pass customs. These MNEs’ have the most power in this situation and will continue to make large profits if nothing is done now. Consumers also contribute to conflict diamonds due to the......

Words: 1093 - Pages: 5

Premium Essay

Victoria Chemicals Case Study 1 Victoria Chemicals (a) Mba9005 Ashley James

...Project Risk and Cost Management Case Study Diamond Chemicals PLC (A): The Merseyside Project Group Members: Divya Yadav, Lamia Nafees, Ashwin Chadaga, Deeshanu Sharma Executive Summary This summary report provides an analysis and estimation of capital budgeting proposed that is being proposed to the Senior Management in Diamond Chemicals. The goal of this project was to save energy, improve process flow and product outputs of the Diamond Chemical Merseyside factory. Diamonds Chemicals, a major competitor in the worldwide chemical industry and a leader in the producer of polypropylene. Lucy Morris, the plant manager estimated £9 million project expenditure to renovate and rationalize the polypropylene production line at the Merseyside Plant in order to make up for deferred maintenance and exploit opportunities to achieve increased production efficiency. The Merseyside plant was constructed in 1967. Diamond Chemicals produced polypropylene at two sites, Merseyside and in Rotterdam, Holland. The company was a supplier to customers based in Europe and in the Middle East. In order for the project to take place the entire polymerization line would need to be closed for 45 days, however, and because the Rotterdam plant was operating near capacity, Merseyside’s customers would buy from competitors. Frank Greystock, the controller at Diamond Chemicals believed that the loss of customers would just be temporary. As a result, the......

Words: 1935 - Pages: 8

Premium Essay

Diamond Chemical Lls Case Solution

...NPV is $9 million with a 21.7% IRR. We believe this is a generally sound scheme from economic evaluation. The weight placed on EPS should be reduced, because it is closely related to the financing structure of a firm and the interest rate is already included in the NPV calculation. Non-economic consideration included project interactions and strategic effects, which are hard to quantify but should be part of the evaluation. Overall, we believe that Morris should continue to promote the project for funding. It meets all the internal investment criteria so it will add value to the shareholders. In addition, based on the Exhibit 1, we realized that right now Diamond Chemicals has the third highest production cost among all competitors. Upon completion of the project, the company will be more cost competitive. Diamond Chemicals will be able to win customers back and potentially attracting more demand due to improved cost efficiency....

Words: 474 - Pages: 2

Premium Essay

Diamond Chemicals Case Study

...Case 3: Diamond Chemicals Diamond Chemicals operates two large polypropylene production plants, the Merseyside Works in England, and the other in Rotterdam, Holland. Diamond Chemicals’ plant manager Lucy Morris is currently examining a (British Pounds) 9 Million project to improve the plant, which has been under scrutiny for poor financial performance. Morris has assumed the responsibility of Merseyside Works, and has decided improvements need to be made. Although there is room for substantial operational improvement, the plant would need to be shut down for about 45 days in order to upgrade. Frank Greystock, Moriss’ controller, has developed a DCF summary of the proposed project. Although the plant’s throughput would surely increase after the upgrade, various company stakeholders have examined the proposed plan to ensure it would increase Diamond Chemical’s Profit. Morris is on the “right track” to improve Diamond Chemical’s existing manufacturing plant. Although Diamond Chemicals is one of the largest, and leading firms, more needs to be done in order to maintain and exceed this competitive position. I believe Morris is examining the correct shortfalls, but more scrutiny on Greystock’s analysis should be provided before a decision is made. More “what if” assumptions need to be made. In addition to examining this project’s DCF models, Diamond Chemical needs to provide other alternatives to the project. For example, various smaller, and larger, cost-reduction......

Words: 1079 - Pages: 5

Free Essay

American Chemical Corporation Case

...American Chemical Case The American Chemical Corporation wanted to buy any and all shares of the Universal Paper Corporation because of their combined efforts in the production of sodium chlorate. To do so without violating the Clayton Act, American agreed to sell their Collinsville production plant to Dixon Corporation. Dixon wants to buy the Collinsville plant to help diversify its specialty chemical product line. This plant initially cost 12 million dollars with an additional 2.25 million dollars needed to buy laminate technology to increase efficiency and profitability of the plant in order. Cash flow analysis with and without the laminate technology will show whether or not Dixon should go further with purchasing the plant. The cost of equity can be calculated as follows. In the case, the yield on Treasury bonds is 9.5%, which is assumed to be the risk free rate. Using a historical equity risk premium 8.4%, the CAPM method says the cost of equity for this project is 9.5%+1.38*8.4% = 21.26%. Since little information about Dixon’s debt is provided in the case, I assumed that all debt Dixon intends to borrow is used in the acquisition of Collinsville plant at 11.25%. We also assume that debt is issued at par. The after-tax cost of debt is (1-0.48)*11.25% = 5.85%. Dixon’s target level of debt-to-asset ratio is 35%, which is used to find the cost of capital: WACC = D/V*After-tax cost of debt + E/V*Cost of equity = 0.35*5.85%+0.65*21.26% = 15.87%. Calculating NPV......

Words: 498 - Pages: 2

Premium Essay

Analysis Diamond Chemicals

...Analysis Diamond Chemicals Introduction This project belongs in the engineering-efficiency category; therefore, it has to fit at least 3 of 4 performance hurdles, which are 1. Impact on EPS; 2.Payback; 3.Discounted cash flow and 4. Internal rate of return. In this article, some of those involved explained and described their opinions; however, professional knowledge may have been lacking. Therefore, we will expound and clarify below. Management Analysis Capital Expenditure On the surface, making sure a project measures up to a range of consistent, prescribed criteria in order to be accepted would appear to be a sound business practice. But in our opinion, we think DC only focused on the financial management. We think they should utilize the strategy map strategy. A strategy map provides a uniform and consistent way to describe that strategy, so that objectives and measures can be established and managed. The strategy map provides the missing link between strategy formulation and strategy execution. (Norton and Kaplan, 2004 *1) Furthermore, DC won't only focus on the financial report; they also manage by human resource and other strategic elements. Also, any of the above financial calculations or assumption could bring the wrong settlement or the expectations will be seriously biased. Economic / Financial Analysis Transportation Costs The transportation division asked that the cost of tank cars required for additional throughput should be involved in the......

Words: 929 - Pages: 4

Premium Essay

Alto Chemical Case Analysis

...ALTO CHEMICALS EUROPE PROBLEM STATEMENT How will Graaff implement the revised strategy across all the subsidiaries which will be beneficial for the company in long run? COMPANY BACKGROUND: • ACE was the regional headquarter of Alto Chemical Corporation. • There were nine wholly owned subsidiaries which produced and sell finished and building block chemicals across Western Europe. • ACE accounted for 1/3rd of alto’s global production and sales Companies had matrix structure. • Company choice for stabilizers was TIN because they have ample raw materials sand feedstock. • Company has competitive advantage as they have started a new plant for feed stock of TIN whereas other procured from third party CASE ANALYSIS: After taking over as the headquarters’ marketing manager, Graaff has devised a new strategy for ACE’s stabilizer business. Earlier the focus of the company was to capture the market share. The company was volume-oriented and competed on price. There are two kinds of stabilizers Tin and Barium, the company’s choice was Tin as it had ample stock of the needed raw material. The switching cost between two variants was high The company focused on trying to convert Barium customers to Tin by offering them a discount of 2-3% below Barium prices and better product performance. The company offered technical service which was important for small and medium sized client. With this strategy they were able to cover 18% market share. Issue with the current strategy......

Words: 814 - Pages: 4

→ Download | Stitchers | Canadian Dollar