CASE QUESTIONS: Victoria Chemicals plc (A): The Merseyside Project
1. Investment criteria: How does Victoria Chemicals evaluate its capital
expenditure proposal? Why is it such a complicated scheme? What are the
merits and drawbacks of using each of the four performance “hurdles” in the
context of this project?
2. Discount rate: What does the analyst from the Treasury Staff mean by his
comment about inflation? Do you agree with it? How do you make adjustments
to the expected cash flow accordingly?
3. Incremental cash flow: How should Greystock modify his Discounted Cash
Flow analysis related to overhead costs, preliminary engineering costs, and
inventories?
4. Relevance: Why does the assistant plant manager offer his suggested change
to include the EPC project in the Merseyside capital budgeting project? Does it
have any merit? Do you need to make any adjustments to the expected cash
flow? If so, how?
5. Cannibalization: What is the director of sales’ suggestion? Does it have any
merit? Assume that there is a 60% chance that cannibalization would happen
and if cannibalization did happen, projected sales would drop by 5%, how do
you make adjustments to the expected cash flow accordingly?
6. Excess capacity: What is the Transport Division’s suggestion? Does it have
any merit? Do you need to make any adjustments to the expected cash flow?
If so, how?
7. Valuation: What is the Merseyside project worth to Victoria Chemicals? Modify
the calculations in Exhibit 2 to reflect all your adjustments above and any other
analyses that you see necessary. How should Greystock make his decision on
whether the project should be accepted?
Notes: For parts 2 to 6, please just state how to adjust the cash flow without
actually calculating the overall NPV with such adjustment. Do the NPV
calculation in part 7 only.
UVA-F-1543 Excel Template – Victoria Chemicals Case questions – Victoria Chemicals
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