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Diamond Chemical Case

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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…...

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