Company Information
As a major competitor within the chemicals industry, Diamond Chemicals was a primary producer of polypropylene. This product is widely popular in the manufacture of different products, including medical products, packaging film, carpet fibres, and automobile components. Furthermore, polypropylene is known for its strength and malleability, which has allowed it to be priced as a commodity. However, despite its reputation, investors believed that Diamond Chemicals needed to improve its financial performance. This improvement was necessary due to the economic slowdown, as well as “the accumulation of the firm’s common shares by a well-known corporate raider, Sir David Benjamin” (Diamond Chemicals PLC (A): The Merseyside Project). As a result, shares fell from ?60 to ?30 from 1999 to 2000. As a result, it was believed that funding could be obtained for a modernization program, known as the Merseyside Project.
Merseyside Project
There are numerous opportunities to the project. With the established project, it is possible to complete the deferred maintenance from previous years. Although previously deferred, these maintenance tasks are now becoming required. By completing these tasks, it is possible to modernize the current plant in order to save energy and improve the process. This includes “relocating and modernizing tank-car unloading areas, which would enable the process flow to be streamlined; refurbishing the polymerization tank to achieve higher pressures and thus greater throughput; and renovating the compounding plant to increase extrusion throughput and obtain energy savings” (Diamond Chemicals PLC (A): The Merseyside Project). The project is attractive due to the lower energy requirement, reducing energy costs, and a 7% manufacturing throughput increase. The most attractive prospect of the project meant that the gross margin would increase from 11.5% to 12.5%. However, concerns arose from the plant needing to be shut down for 45 days. This could result in a loss of customers; however, it is not expected to be permanent.
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Project Promotion
The project should be promoted because it is expected to exceed the company policy of 10% project return at 25.9%. This will allow the company to obtain new customers and meet the expectations of the company. Furthermore, the investors will be satisfied due to the financial performance improvement.
Recommendations
The transport division is responsible for more than just Merseyside. Therefore, the division is responsible for the costs to increasing its rolling stock. Merseyside is expected to have increased production; therefore, it is believed that customers will change to Diamond Chemicals. This will increase sales. As a result, Rotterdam will still be utilized within the company. It is suggested to include the EPC production line project. Although this project has a negative NPV, the overall project will still have a positive NPV. Furthermore, as the recession ends, by having the production line renovated, the company will be able to establish strong competitive advantages and gain customers from other companies due to improved production. The most recent manual with company policy regarding capital budgeting promotes 10% discount rates. Therefore, this should be the amount used for the financial analysis.
Conclusion
Diamond Chemicals is known as being a major competitor within the chemicals industry. Furthermore, the company has established a name for itself as a primary producer of polypropylene, which is used in many different products because of its strength and malleability. As such, the product is priced as a commodity. Although the company has a strong reputation, it is believed that its financial performance can be improved. It is believed that this improvement is necessary as the result of the economic slowdown and share accumulation by Sir David Benjamin, causing shares to fall from ?60 to ?30 from 1999 to 2000.
The promoted project has numerous possibilities, including modernizing the process flow. In order to do this, it is required that the plant be shut down for 45 days. However, despite the loss of sales for this time frame, it is not expected to be permanent. Previously deferred maintenance tasks are now required. However, by completing these tasks and modernizing the process flow, the plant can be energy-saving and have an increased throughput. This includes streamlining the process flow, increasing pressure in the polymerization tank, and increase extrusion throughput. The manufacturing increase is expected to be 7%. The gross margin would increase from 11.5% to 12.5%.
The expected return for the project is 25.9%, which is much higher than the company policy requiring 10% project return. As a result, the project is viable and will allow the company to obtain new customers. It will also satisfy investors due to increased financial performance.
Varying departments of Diamond Chemicals had concerns relating to the Merseyside Project. The transport division is concerned about the additional cost of rolling stock. The division feels that this cost should be incorporated in the total bid. However, this addition is only requested due to the Merseyside Project. Despite this, the transport division is responsible for the entire company, not just the one plant location. Therefore, the transport division should be responsible for this cost through its own budget. There are also concerns in the sales division that Rotterdam will no longer be used. However, through the modernization of Merseyside, it is anticipated that sales will be increased, requiring the use of Rotterdam, negating the need for a ‘cannibalization’ fee. Although technically a second project, the EPC production line project should be included with the overall project. This is because that this secondary project will increase the effectiveness and efficiency of the entire plant. This is the overall goal for this project. The negative NPV of the secondary project alone is combined with the overall project’s positive NPV, allowing the necessary renovations to be completed, allowing the company to be ready to compete aggressively as the recession ends. Finally, company policy states to use a 10% discount rate. Therefore, the financial analysis must reflect policy.
- (n.d.). Diamond Chemicals PLC (A): The Merseyside Project.
