Executive Summary:

Victoria Chemicals is a leading producer of polypropylene, a polymer used in a wide

variety of products. Their factory at Merseyside consists of old production only semi continuous,
causing the factory to have higher labor content. In order to remain relevant and profitable in
such a competitive market, Victoria Chemicals needs to update its antiquated plant design.
When Lucy Morris took over her position as plant manager, she discovered many
opportunities to improve the polypropylene production. Some improvement stem from deferring
maintenance over the preceding five years. Capital expenditures by the company only consisted
of the most essential. Now what was deferred is going to be essential. By making improvements,
it would save energy and improve process flow. Included in the improvements would be:
1.
Relocating and modernizing tank-car unloading areas, which would enable process flow
to be streamlined.
2.

Refurbishing the polymerization tank to achieve higher pressures and thus greater output.

3.
Renovating the compounding plant to increase extrusion throughput and obtain energy
savings.
The improvements are proposed to be GPB12 million by plant manager Lucy Morris. The
disadvantages to this proposal would be that the plant would be shut down for 45 days, thus
running the risk of losing customers. The advantages would be lower energy requirements and
7% greater manufacturing throughput. Also, the project is expected to improve the gross margin
from 11.5% to 12.5%.
The proposed project has objections by different divisions of Victoria Chemicals. The
first division that is concerned is the Transport Division. They could increase their allocation of
tank cars to Merseyside, but with the anticipated growth of the firm, they believe they will have
to purchase new tank cars.
The second division with concerns is with the sales and marketing departments. They
point out that although the project assumes Victoria Chemicals can sell the added output they are
predicting, can they actually sell it? The market for polypropylene is extremely competitive, and
the industry is in a downturn. They think that this will cause cannibalization within the
company.
The third objection is by the Assistant Plant Manager Griffin Tewitt. He has been
engrossed in renovating the ethylene-propylene-copolymer rubber (EPC) part of the plant. His
project would give Victoria Chemicals the lowest EPC cost base in the world, but his NPV for
the project was (GBP750,000). He believes his project should be included in the renovations.

The final objections are by the treasury staffs who believe that because of inflation the
discount rate should be 7% instead of 10%. This is ignored in the analysis, and 10% is continued
to be used.
Problem Statement:
Will undertaking the capital program to improve productions at Merseyside improve the
financial performance of Victoria Chemicals? Will taking on this project cause a loss of business
volume?
Data Analysis:
The expected Net Present value of this project is GBP10.5 million. NPV gives
explicit consideration to the time value of money. It is measured by subtracting a projects initial
investment from the present value of the cash inflows discounted at a rate equal to the firms cost
of capital. If the NPV of the project is greater than zero, then the firm can believe that this is an
acceptable project. The higher the NPV, the better the return for stockholders.
The internal rate of return for this project is 24%. The IRR is the discount rate that makes
the net present value equal to zero. IRR is important to this project because it includes risk.
With the market in a downturn, IRR is going to be important. The IRR must be better than the
hurdle rate of 10%, where clearly this project achieves that. The addition to Earnings per share of
this project is GBP0.22. For engineering-efficiency projects, the contribution to net income has
to be positive, which this is.
The payback period for the program is 3.8 years. The shorter the payback period, the
better a project is believed to be. We do not take depreciation into consideration for this
evaluation. 3.8 years would be acceptable. The profitability index is based upon NPV. The
profitability index for Merseyside is 1.15%. This means Victoria Chemicals will earn 1.15% on
initial GBP12 million invested above and beyond return needed to pay initial investment cost.