Diamond Chemicals Plc

Corporate Finance

Case Analysis

 ‘Diamond Chemicals Plc (A)’

Submitted By:

Shashank Shekhar Suri (0336/51)

Ashik Siroya (0355/51)

T. Rohith Raja (0372/51)

Vibhu Sharma(0391/51)

Vishal Savanur (0401/51)

Vivek Salwan (0406/51)

Corporate Finance

Case Discussion : ‘Diamond Chemicals Plc (A)’

• What should Morris be prepared to say to her assistant plant manager?

The assistant manager wanted Morris to include an EPC project as a part of the overall project since the overall positive NPV will be easily be able to sustain the negative NPV of the EPC project. Morris should not agree to the proposal and explain to the assistant plant manager that the EPC project is unrelated to the overall project and including this would be against corporate ethics.

• What should Morris be prepared to say to the analyst from the Treasury Stock?

Andrew Gowan, the analyst from the Treasury Stock suggested that the 10% hurdle rate used is nominal but the real target rate of return is 7% (long term inflation of 3% per year). Morris should continue to use 10% because the inflation rate given in exhibit 2 is specific to polypropylene costs & prices only whereas the hurdle rate should include 3% inflation rate which is prevailing in the market. Moreover, since the overall financial projection done for cash flows and income statement are nominal, the discount rate used should also be nominal.

• What should Morris be prepared to say to the Director of Sales?

Since the industry is in a downturn, there is a strong chance of the production from Merseyside to cannibalize the production from Rotterdam. Even if we consider the case where the entire incremental output of Merseyside cannibalizes output from Rotterdam (on the basis that after revamp Merseyside will be able to produce at lower costs), the projection reflects a positive NPV of £2.91million and IRR of 16.3%, (satisfying the required criteria)

Also if we consider the case suggested by VP Marketing where, cannibalization will occur during recession period only (we have assumed recession to last for the first 3 years), we get NPV of £6.17 million and IRR 21.3%. So in both scenarios the project satisfies required criteria.

• What should Morris be prepared to say to the Transport Division?

The Transport Division has an excess capacity which would not immediately impact the capital budgeting but they would be required to advance their capacity expansion plans from 2005 to 2003. We have considered a cash outflow of £2 million in 2003 and a cash inflow of £2 million in 2005. We have also taken  into account the opportunity costs arising out of advancement of investment and the tax consequences due to change in depreciation schedule. We have analyzed 3 possible scenarios