Diamond Chemicals PLC is a major competitor in the chemical industry and one of the leading producers of polypropylene. Lucy Morris who is the plant manager of the Merseyside plant is recommending a £9 million project to renovate and modernize the plant. The initial analysis done by the plant controller Greystock had raised several objections that needed to be addressed. Revised cash flow analysis suggests that the company should go for the project as it met all the performance hurdles. The timing of the project is also perfect considering that the economy is in a downturn. Strategically, this project is essential for the company in order to preserve their lower cost advantage.
· DCF Analysis of Merseyside Project(financial values in millions of British pounds)
· Payback period
· Depreciation Calculation
· Double declining used Yr 1-8
· Straight line used Yr 9-10
· Double declining used Yr 1-10
· Straight line used Yr 11-15
· Incremental Depreciation
1. What changes, if any, should Lucy Morris ask Frank Greystock to make in his discounted-cash-flow analysis? Why? What should Morris be prepared to say to the Transport Division, the Director of Sales, her assistant plant manager, and the analyst from the Treasury staff?
2. How attractive is the Merseyside project? By what criteria?
3. Should Morris continue to promote the project for funding?