VICTORIA CHEMICALS plc (A)

Presented by Group 2 :
Aldy Rifianto, Dedy Mardianto
Floriana Nataly, Hiralalitya
Lextro Kristiano Concorda
Natallia Winata, Wita Puspadilla
Yosua Bangun
THE MERSEYSIDE PROJECT
SUMMARY

PROBLEM IDENTIFICATION

ALTERNATIVE SOLUTION

RECOMENDATION
 SUMMARY
• Victoria Chemicals, a major competitor in the
Worldwide chemicals industry, was a leading
producer of polypropylene, a polymer used in
an extremely wide variety of products
 SUMMARY
Victoria Chemicals was under
pressure from investors to
improve its financial
performance because of the
accumulation of the firm’s
common shares by a well
known corporate raider. The
Earnings was fallen to 180
pence per share at the end of
2007 from around 250 pence
per share at the end of 2006.
 SUMMARY

Lucy Morris was plant Manager of

Victoria Chemicals Merseyside Works
in Liverpool, England. Her Controller
Frank Greystock was discussing a
capital project that Morris wanted to
propose to senior management. The
Project Consisted of a (British
Pounds) GBP 12 Million expenditure
to renovate and rationalize the
polypropylene production line at the
Merseyside plant in order to make up
for deferred maintenance and to
exploit opportunities to achieve
increased production efficiency.
 SUMMARY
• Beside The Polypropylene plant at Merseyside
also has Etylene Propylene Copolymer rubber
(EPC).
• EPC remainded a relatively small product in the
European chemical Industry.
• Victoria, the Largest supplier of EPC, Produced
the entire volume at Merseyside.
• EPC had been only marginally profitable to
Victoria because of the entry by compatitors and
the development of competing synthetic-rubber
compounds over the past five years
 SUMMARY
The Merseyside project
would be in the
engineering-efficiency
category :
• Impact on earning per share
= had to be positive.
• Payback = maximum six
years.
• Discounted cash flow = had
to be positive.
• Internal rate of return had
to be greater than 10%.
 PROBLEM INDENTIFICATION
• Victoria Chemicals must
improve its Financial
Performance and raise the
Earnings per share
• The Merseyside Production
process was constructed in
1967.
• The Price of Polypropylene
very competitive
• There is 7 Major Competitors
manufactured polypropylene
with various cost Level.
 PROBLEM INDENTIFICATION

Production
Plant Annual
Plant Cost per Ton
Company Built In output
Location (indexed to low
(metric tons)
cost producer)
CBTG A.G Saarbrun 1981 350.000 1,00
Victoria Chem. Liverpool 1967 250.000 1,09
Victoria Chem. Rotterdam 1967 250.000 1,09
Hosche A.G Hamburg 1977 300.000 1,02
Montecassino SpA Genoa 1961 120.000 1,11
Saone-Poulet S.A Merseille 1972 175.000 1,07
Vaysol S.A Antwerp 1976 220.000 1,06
Next 10 Largest Plants 450.000 1,19
 PROBLEM INDENTIFICATION
• The Director of sales analysis that the industry
of Polypropylene is in a downturn and it
lookslike a oversupply is in the works. This
means that we will probably have to shift
capacity away from Rotterdam toward
Merseyside in order to move the added
volume. Is this a really a gain for Victoria
Chemicals? Why spend money just so one
plant can cannibalize another?
 PROBLEM INDENTIFICATION
• EPC Plant at Meyerside also need to
renovation to keep produce the Etylene
Propylene Copolymer.
• If EPC Project calculate seperately from
Polypropylene Project it was negative NPV and
the company ignore it.
• If EPC Plant never do Renovation, Victoria
Company will have to exit the EPC business
during in 3 years.
 ALTERNATIF SOLUTION
The Proposed Capital Program
• Morris proposed an expenditure of GBP 12
Million on this Program.
• The Entire Polymerization line would need to
be shut down for 45 days.
• Will Loss the customer during shut down can
not supply to customer.
• greystock.xlsx
 ALTERNATIVE SOLUTION
• The Condition of Calculation was :
Assumptions :
Annual Output (metric tons) 250.000 Investment Outlay (mill.) 12,00
Output Gain/Original Output 7,0% Discount rate 10%
Price/ton (pounds sterling) 675 Depreciable Life (years) 15
Inflation Rate (prices and costs) 0,0% Overhead/Investment 3,50%
Gross Margin (ex. Deprec.) 12,50% Salvage Value 0
Old Gross Margin 11,50% WIP Inventory/Cost of Goods 3%
Tax Rate 30,0% Months Downtime, Construction 1,5
Energy Savings/Sales Yr. 1-5 1,25% After-tax Scrap Proceeds 0
Yr. 6-10 0,80% Preliminary Engineering Costs 0,5
Yr. 11-15 0,00%
 Lampiran 1
GREYSTOCK'S MERSEYSIDE PROJECT
(Financial values in millions of British Pounds)

Assumptions :
Annual Output (metric tons) 250.000 Investment Outlay (mill.) 12,00
Output Gain/Original Output 7,0% Discount rate 10%
Price/ton (pounds sterling) 675 Depreciable Life (years) 15
Inflation Rate (prices and costs) 0,0% Overhead/Investment 3,50%
Gross Margin (ex. Deprec.) 12,50% Salvage Value 0
Old Gross Margin 11,50% WIP Inventory/Cost of Goods 3%
Tax Rate 30,0% Months Downtime, Construction 1,5
Energy Savings/Sales Yr. 1-5 1,25% After-tax Scrap Proceeds 0
Yr. 6-10 0,80% Preliminary Engineering Costs 0,5
Yr. 11-15 0,00%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Year Now 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
1 Estimate of Incremental Gross Profit
New Output (tons) 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500
Lost Output--Construction (33.438)
New Sales (Millions) 157,99 180,56 180,56 180,56 180,56 180,56 180,56 180,56 180,56 180,56 180,56 180,56 180,56 180,56 180,56
New Gross Margin 13,75% 13,75% 13,75% 13,75% 13,75% 13,30% 13,30% 13,30% 13,30% 13,30% 12,50% 12,50% 12,50% 12,50% 12,50%
New Gross Profit 21,72 24,83 24,83 24,83 24,83 24,01 24,01 24,01 24,01 24,01 22,57 22,57 22,57 22,57 22,57

Old Output 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000
Old Sales 168,75 168,75 168,75 168,75 168,75 168,75 168,75 168,75 168,75 168,75 168,75 168,75 168,75 168,75 168,75
Old Gross Profit 19,41 19,41 19,41 19,41 19,41 19,41 19,41 19,41 19,41 19,41 19,41 19,41 19,41 19,41 19,41
Incremental Gross Profit 2,32 5,42 5,42 5,42 5,42 4,61 4,61 4,61 4,61 4,61 3,16 3,16 3,16 3,16 3,16

2 Estimate of Incremental WIP Inventory

New WIP Inventory 4,67 4,67 4,67 4,67 4,67 4,70 4,70 4,70 4,70 4,70 4,74 4,74 4,74 4,74 4,74
Old WIP Inventory 4,48 4,48 4,48 4,48 4,48 4,48 4,48 4,48 4,48 4,48 4,48 4,48 4,48 4,48 4,48
Incremental WIP Inventory 0,19 0,19 0,19 0,19 0,19 0,22 0,22 0,22 0,22 0,22 0,26 0,26 0,26 0,26 0,26

3 Estimate of Incremental Depreciation

New Depreciation 1,60 1,39 1,20 1,04 0,90 0,78 0,68 0,59 0,32 0,32 0,32 0,32 0,32 0,32 0,32
4 Overhead 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42
5 Prelim. Engineering Costs 0,50
6 Pretax Incremental Profit -0,20 3,61 3,80 3,96 4,10 3,41 3,51 3,60 3,87 3,87 2,42 2,42 2,42 2,42 2,42
7 Tax Expense -0,06 1,08 1,14 1,19 1,23 1,02 1,05 1,08 1,16 1,16 0,73 0,73 0,73 0,73 0,73
8 After-tax Profit -0,14 2,53 2,66 2,77 2,87 2,38 2,46 2,52 2,71 2,71 1,70 1,70 1,70 1,70 1,70
9 Cash Flow Adjustments
Less Capital Expenditures -12,00
Add back Depreciation 1,60 1,39 1,20 1,04 0,90 0,78 0,68 0,59 0,32 0,32 0,32 0,32 0,32 0,32 0,32
Less Added WIP inventory -0,19 0,00 0,00 0,00 0,00 -0,03 0,00 0,00 0,00 0,00 -0,04 0,00 0,00 0,00 0,00

10 Free Cash Flow -12,00 1,27 3,92 3,86 3,81 3,77 3,14 3,14 3,11 3,03 3,03 1,97 2,02 2,02 2,02 2,02

AVG Annual Add to EPS = 0,023

PAYBACK (years) = 3,80
NPV = 10,45
IRR = 24,08%
 Lampiran 2
MERSEYSIDE PROJECT
(Financial values in millions of British Pounds)

Assumptions :
Annual Output (metric tons) 250.000 Investment Outlay (mill.) 12,00
Output Gain/Original Output 7,0% Discount rate 10%
Price/ton (pounds sterling) 675 Depreciable Life (years) 15
Inflation Rate (prices and costs) 0,0% Overhead/Investment 3,50%
Gross Margin (ex. Deprec.) 12,50% Salvage Value 0
Old Gross Margin 11,50% WIP Inventory/Cost of Goods 3%
Tax Rate 30,0% Months Downtime, Construction 1,5
Energy Savings/Sales Yr. 1-5 1,25% After-tax Scrap Proceeds 0
Yr. 6-10 0,80% Preliminary Engineering Costs 0,5
Yr. 11-15 0,00%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Year Now 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
1 Estimate of Incremental Gross Profit
New Output (tons) 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500
Lost Output--Construction (33.438)
New Sales (Millions) 157,99 180,56 180,56 180,56 180,56 180,56 180,56 180,56 180,56 180,56 180,56 180,56 180,56 180,56 180,56
New Gross Margin 13,75% 13,75% 13,75% 13,75% 13,75% 13,30% 13,30% 13,30% 13,30% 13,30% 12,50% 12,50% 12,50% 12,50% 12,50%
New Gross Profit 21,72 24,83 24,83 24,83 24,83 24,01 24,01 24,01 24,01 24,01 22,57 22,57 22,57 22,57 22,57

Old Output 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000
Old Sales 168,75 168,75 168,75 168,75 168,75 168,75 168,75 168,75 168,75 168,75 168,75 168,75 168,75 168,75 168,75
Old Gross Profit 19,41 19,41 19,41 19,41 19,41 19,41 19,41 19,41 19,41 19,41 19,41 19,41 19,41 19,41 19,41
Incremental Gross Profit 2,32 5,42 5,42 5,42 5,42 4,61 4,61 4,61 4,61 4,61 3,16 3,16 3,16 3,16 3,16

2 Estimate of Incremental WIP Inventory

New WIP Inventory 4,09 4,67 4,67 4,67 4,67 4,70 4,70 4,70 4,70 4,70 4,74 4,74 4,74 4,74 4,74
Old WIP Inventory 4,48 4,48 4,48 4,48 4,48 4,48 4,48 4,48 4,48 4,48 4,48 4,48 4,48 4,48 4,48
Incremental WIP Inventory -0,39 0,19 0,19 0,19 0,19 0,22 0,22 0,22 0,22 0,22 0,26 0,26 0,26 0,26 0,26

3 Estimate of Incremental Depreciation

New Depreciation 1,60 1,39 1,20 1,04 0,90 0,78 0,68 0,59 0,32 0,32 0,32 0,32 0,32 0,32 0,32
4 Overhead 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42
5 Prelim. Engineering Costs 0,50
6 Pretax Incremental Profit -0,20 3,61 3,80 3,96 4,10 3,41 3,51 3,60 3,87 3,87 2,42 2,42 2,42 2,42 2,42
7 Tax Expense -0,06 1,08 1,14 1,19 1,23 1,02 1,05 1,08 1,16 1,16 0,73 0,73 0,73 0,73 0,73
8 After-tax Profit -0,14 2,53 2,66 2,77 2,87 2,38 2,46 2,52 2,71 2,71 1,70 1,70 1,70 1,70 1,70
9 Cash Flow Adjustments
Less Capital Expenditures -12,00
Add back Depreciation 1,60 1,39 1,20 1,04 0,90 0,78 0,68 0,59 0,32 0,32 0,32 0,32 0,32 0,32 0,32
Less Added WIP inventory 0,39 -0,58 0,00 0,00 0,00 -0,02 0,00 0,00 0,00 0,00 -0,04 0,00 0,00 0,00 0,00

10 Free Cash Flow -12,00 1,85 3,33 3,86 3,81 3,77 3,14 3,14 3,11 3,03 3,03 1,97 2,02 2,02 2,02 2,02

AVG Annual Additio to EPS = 0,023

PAYBACK (years) = 3,80
NPV = 10,50
IRR = 24,30%
 ALTERNATIVE SOLUTION
Concern of The Transport Division :
• Will Need a New Tank Car to anticipated growth of the firm in
other areas because of increased throughtput of the machine.
• The Investment of a New Tank Car estimated to be GBP 2 million in
2010
• The New Tank Car would have a depreciable life of 10 years using
DDB Depreciation for the first 8 years and straight-line depreciation
for the last two years. Tank car.xlsx
 MERSEYSIDE PROJECT
(With a New Tank Car Investment)
(Financial values in millions of British Pounds)

Assumptions :
Annual Output (metric tons) 250.000 Investment Outlay (mill.) - Plant 12
Output Gain/Original Output 7% Investment in Tank Cars 2
Price/ton (pounds sterling) 675 Discount rate 10%
Inflation (prices and costs) 0,00% Depreciable Life (years) Plant 15
Gross Margin (ex. Deprec.) 12,50% Depreciable Life (yrs.) Tank Cars 10
Old Gross Margin 11,50% Overhead/Investment 3,50%
Tax Rate 30% Salvage Value 0%
Energy Savings/Sales Yr. 1-5 1,25% WIP Inventory/Cost of Goods Sold 3%
Yr. 6-10 0,80% Months Downtime, Construction 1,50
Yr. 11-15 0,00% Preliminary Engineering Costs 0,50

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Year Now 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
1 Estimate of Incremental Gross Profit
New Output 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500
Lost Output--Construction (33.438)
New Sales (Millions) 157,99 180,56 180,56 180,56 180,56 180,56 180,56 180,56 180,56 180,56 180,56 180,56 180,56 180,56
New Gross Margin 13,75% 13,75% 13,75% 13,75% 13,75% 13,30% 13,30% 13,30% 13,30% 13,30% 12,50% 12,50% 12,50% 12,50%
New Gross Profit 21,72 24,83 24,83 24,83 24,83 24,01 24,01 24,01 24,01 24,01 22,57 22,57 22,57 22,57

Old Output 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000
Old Sales 168,75 168,75 168,75 168,75 168,75 168,75 168,75 168,75 168,75 168,75 168,75 168,75 168,75 168,75
Old Gross Profit 19,41 19,41 19,41 19,41 19,41 19,41 19,41 19,41 19,41 19,41 19,41 19,41 19,41 19,41
Incremental Gross Profit 2,32 5,42 5,42 5,42 5,42 4,61 4,61 4,61 4,61 4,61 3,16 3,16 3,16 3,16

2 Estimate of Incremental WIP Inventory

New WIP Inventory 4,09 4,67 4,67 4,67 4,67 4,70 4,70 4,70 4,70 4,70 4,74 4,74 4,74 4,74
Old WIP Inventory 4,48 4,48 4,48 4,48 4,48 4,48 4,48 4,48 4,48 4,48 4,48 4,48 4,48 4,48
Incremental WIP Inventory -0,39 0,19 0,19 0,19 0,19 0,22 0,22 0,22 0,22 0,22 0,26 0,26 0,26 0,26

3 Estimate of Incremental Depreciation

+ New Depreciation-Plant 1,60 1,39 1,20 1,04 0,90 0,78 0,68 0,59 0,32 0,32 0,32 0,32 0,32 0,32
+ New Depreciation, Tank Cars 0,40 0,32 0,26 0,20 0,16 0,13 0,10 0,08 0,17 0,17 0,00 0,00
Total Change in Depreciation 1,60 1,39 1,60 1,36 1,16 0,99 0,84 0,72 0,42 0,40 0,49 0,49 0,32 0,32
4 Overhead 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42
5 Prelim. Engineering Costs 0,50
6 Pretax Incremental Profit -0,20 3,61 3,40 3,64 3,84 3,20 3,35 3,47 3,76 3,78 2,26 2,26 2,42 2,42
7 Tax Expense -0,06 1,08 1,02 1,09 1,15 0,96 1,00 1,04 1,13 1,14 0,68 0,68 0,73 0,73
8 After-tax Profit -0,14 2,53 2,38 2,55 2,69 2,24 2,34 2,43 2,63 2,65 1,58 1,58 1,70 1,70

9 Cash Flow Adjustments

Add back Depreciation 1,60 1,39 1,60 1,36 1,16 0,99 0,84 0,72 0,42 0,40 0,49 0,49 0,32 0,32
Added WIP inventory -0,39 -0,58 0,00 0,00 0,00 -0,02 0,00 0,00 0,00 0,00 -0,04 0,00 0,00 0,00
Capital Investment -12,00 -2,00

Free
10 Cash Flow -12,00 1,07 3,33 1,98 3,91 3,85 3,20 3,18 3,15 3,06 3,05 2,02 2,07 2,02 2,02

AVG Annual Additio to EPS = 0,022

PAYBACK (years) = 4,40
NPV = 8,62
IRR = 21,03%
 ALTERNATIVE SOLUTION
Concern of The Marketing
Department :
• With a new project will reduce the
cost at Merseyside and Victoria
Chemicals might be able to take
business from the plants of
competitors such as Saone-Poulet
or Vaysol.
• Cannibalize business at Rotterdam
in his preliminary analysis of the
Merseyside Project.
• Morris still wanted to review
Greystock’s analysis in detail the
potential loss of business volume at
rotterdam
• Loss Rotterdam.xlsx
 (Loss of business volume at Rotterdam)
(Financial values in millions of British Pounds)

Assumptions
Annual Output (metric tons) 250.000 Investment Outlay (mill.) - Plant 12
Output Gain/Original Output 7% Investment in Tank Cars 2
Price/ton (pounds sterling) 675 Discount rate 10%
Inflation (prices and costs) 0% Depreciable Life (years) Plant 15
Gross Margin (ex. Deprec.) 12,50% Depreciable Life (yrs.) Tank Cars 10
Old Gross Margin 11,50% Overhead/Investment 3,5%
Tax Rate 30% Salvage Value 0
Energy Savings/Sales Yr. 1-5 1,25% WIP Inventory/Cost of Goods 3,0%
Yr. 6-10 0,8% Months Downtime, Construction 1,50
Yr. 11-15 0,0%

1 2 3 4 5 6 7 8 9 10 11 12 13 14
Year Now 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

1 Estimate of Incremental Gross Profit

New Output 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500
Lost Output--Construction (33.438)
New Sales (Millions) 157,99 180,56 180,56 180,56 180,56 180,56 180,56 180,56 180,56 180,56 180,56 180,56 180,56 180,56
New Gross Margin 13,8% 13,8% 13,8% 13,8% 13,8% 13,3% 13,3% 13,3% 13,3% 13,3% 12,5% 12,5% 12,5% 12,5%
New Gross Profit 21,72 24,83 24,83 24,83 24,83 24,01 24,01 24,01 24,01 24,01 22,57 22,57 22,57 22,57

Old Output 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000
Old Sales 168,75 168,75 168,75 168,75 168,75 168,75 168,75 168,75 168,75 168,75 168,75 168,75 168,75 168,75
Old Gross Profit 19,41 19,41 19,41 19,41 19,41 19,41 19,41 19,41 19,41 19,41 19,41 19,41 19,41 19,41

Lost Rotterdam Output (MT) 17.500 17.500 17.500 17.500 17.500 17.500 17.500 17.500 17.500 17.500 17.500 17.500 17.500 17.500
Lost Revenue 11,81 11,81 11,81 11,81 11,81 11,81 11,81 11,81 11,81 11,81 11,81 11,81 11,81 11,81
Lost Rotterdam Gross Profit 1,36 1,36 1,36 1,36 1,36 1,36 1,36 1,36 1,36 1,36 1,36 1,36 1,36 1,36

Incremental Gross Profit 0,96 4,06 4,06 4,06 4,06 3,25 3,25 3,25 3,25 3,25 1,81 1,81 1,81 1,81

2 Estimate of Incremental WIP Inventory

New WIP Inventory 4,09 4,67 4,67 4,67 4,67 4,70 4,70 4,70 4,70 4,70 4,74 4,74 4,74 4,74
Old WIP Inventory 4,48 4,48 4,48 4,48 4,48 4,48 4,48 4,48 4,48 4,48 4,48 4,48 4,48 4,48
Incremental WIP Inventory -0,39 0,19 0,19 0,19 0,19 0,22 0,22 0,22 0,22 0,22 0,26 0,26 0,26 0,26

3 Estimate of Incremental Depreciation

+ New Depreciation, Plant 1,60 1,39 1,20 1,04 0,90 0,78 0,68 0,59 0,32 0,32 0,32 0,32 0,32 0,32
+ New Depreciation,Tank Cars 0,40 0,32 0,26 0,20 0,16 0,13 0,13 0,13 0,13 0,13 0,00 0,00

Total Change in Depreciation 1,60 1,39 1,60 1,36 1,16 0,99 0,84 0,72 0,45 0,45 0,45 0,45 0,32 0,32
4 Overhead 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42
5 Prelim. Engineering Costs 0,50
6 Pretax Incremental Profit -1,56 2,26 2,04 2,28 2,48 1,84 1,99 2,11 2,38 2,38 0,94 0,94 1,07 1,07
7 Tax Expense -0,47 0,68 0,61 0,68 0,75 0,55 0,60 0,63 0,71 0,71 0,28 0,28 0,32 0,32
8 After-tax Profit -1,09 1,58 1,43 1,60 1,74 1,29 1,39 1,48 1,67 1,67 0,65 0,65 0,75 0,75

9 Cash Flow Adjustments

Add back Depreciation 1,60 1,39 1,60 1,36 1,16 0,99 0,84 0,72 0,45 0,45 0,45 0,45 0,32 0,32
Change in WIP Inventory
At Merseyside 0,39 -0,19 -0,19 -0,19 -0,19 -0,22 -0,22 -0,22 -0,22 -0,22 -0,26 -0,26 -0,26 -0,26
At Rotterdam -0,39 0,19 0,19 0,19 0,19 0,22 0,22 0,22 0,22 0,22 0,26 0,26 0,26 0,26
Capital Investment -12,00 -2,00

10 Free Cash Flow -12,00 0,51 2,97 1,03 2,96 2,90 2,28 2,23 2,20 2,12 2,12 1,10 1,10 1,07 1,07

AVG Annual Add to EPS = 0,012

PAYBACK (years) = 5,70
NPV = 2,26
IRR = 13,32%
 ALTERNATIVE SOLUTION
Concern of The Treasury Staff:

The Treasury staff think this

impounds a long term
inflation expectation of 3%
per year and target rate of
return is 7%
• inflasi.xlsx
 MERSEYSIDE PROJECT
(With Inflation)
(Financial values in millions of British Pounds)

Assumptions :
Annual Output (metric tons) 250.000 Investment Outlay (mill.) - Plant 12
Output Gain/Original Output 7% Investment in Tank Cars 2
Price/ton (pounds sterling) 675 Discount rate 7%
Inflation (prices and costs) 3,00% Depreciable Life (years) Plant 15
Gross Margin (ex. Deprec.) 12,50% Depreciable Life (yrs.) Tank Cars 10
Old Gross Margin 11,50% Overhead/Investment 3,50%
Tax Rate 30% Salvage Value 0%
Energy Savings/Sales Yr. 1-5 1,25% WIP Inventory/Cost of Goods Sold 3%
Yr. 6-10 0,80% Months Downtime, Construction 1,50
Yr. 11-15 0,00% Preliminary Engineering Costs 0,50

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Year Now 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
1 Estimate of Incremental Gross Profit
New Output 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500
Lost Output--Construction (33.438)
New Sales (Millions) 157,99 185,98 191,56 197,31 203,22 209,32 215,60 222,07 228,73 235,59 242,66 249,94 257,44 265,16
New Gross Margin 13,75% 13,75% 13,75% 13,75% 13,75% 13,30% 13,30% 13,30% 13,30% 13,30% 12,50% 12,50% 12,50% 12,50%
New Gross Profit 21,72 25,57 26,34 27,13 27,94 27,84 28,67 29,54 30,42 31,33 30,33 31,24 32,18 33,15

Old Output 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000
Old Sales 168,75 173,81 179,03 184,40 189,93 195,63 201,50 207,54 213,77 220,18 226,79 233,59 240,60 247,82
Old Gross Profit 19,41 19,99 20,59 21,21 21,84 22,50 23,17 23,87 24,58 25,32 26,08 26,86 27,67 28,50
Incremental Gross Profit 2,32 5,58 5,75 5,92 6,10 5,34 5,50 5,67 5,84 6,01 4,25 4,38 4,51 4,65

2 Estimate of Incremental WIP Inventory

New WIP Inventory 4,09 4,81 4,96 5,11 5,26 5,44 5,61 5,78 5,95 6,13 6,37 6,56 6,76 6,96
Old WIP Inventory 4,48 4,61 4,75 4,90 5,04 5,19 5,35 5,51 5,68 5,85 6,02 6,20 6,39 6,58
Incremental WIP Inventory -0,39 0,20 0,20 0,21 0,22 0,25 0,26 0,27 0,27 0,28 0,35 0,36 0,37 0,38

3 Estimate of Incremental Depreciation

+ New Depreciation-Plant 1,60 1,39 1,20 1,04 0,90 0,78 0,68 0,59 0,32 0,32 0,32 0,32 0,32 0,32
+ New Depreciation, Tank Cars 0,40 0,32 0,26 0,20 0,16 0,13 0,10 0,08 0,17 0,17 0,00 0,00
Total Change in Depreciation 1,60 1,39 1,60 1,36 1,16 0,99 0,84 0,72 0,42 0,40 0,49 0,49 0,32 0,32
4 Overhead 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42
5 Prelim. Engineering Costs 0,50
6 Pretax Incremental Profit -0,20 3,78 3,73 4,14 4,52 3,94 4,24 4,53 4,99 5,19 3,34 3,47 3,77 3,91
7 Tax Expense -0,06 1,13 1,12 1,24 1,36 1,18 1,27 1,36 1,50 1,56 1,00 1,04 1,13 1,17
8 After-tax Profit -0,14 2,64 2,61 2,90 3,17 2,75 2,97 3,17 3,50 3,63 2,34 2,43 2,64 2,73

9 Cash Flow Adjustments

Add back Depreciation 1,60 1,39 1,60 1,36 1,16 0,99 0,84 0,72 0,42 0,40 0,49 0,49 0,32 0,32
Added WIP inventory -0,39 -0,59 -0,01 -0,01 -0,01 -0,03 -0,01 -0,01 -0,01 -0,01 -0,07 -0,01 -0,01 -0,01
Capital Investment -12,00 -2,00

Free
10 Cash Flow -12,00 1,07 3,44 2,21 4,26 4,32 3,71 3,80 3,88 3,91 4,03 2,76 2,91 2,95 3,04

AVG Annual Add to EPS = 0,029

PAYBACK (years) = 4,30
NPV = 17,55
IRR = 24,10%
 RECOMENDATION
• The Merseyside plant must to modernize the machine to
increase the throughout and lower cost of energy.
• The Transport Division need to purchase the new tank cars
at Merseyside (estimate purchase GBP 2 Million in 2010).
• Merseyside can save stock everymonth or transfer stock
from Rotterdam
• We Are not agree about Merseyside will oversupply and
Cannibalize the Rotterdam supply.
• Reasonable if the Treasury Staff concern about Inflation 3%
per year and Rate of Return 7% per year.
• Rejected EPC Project .
• inflasi 2.xlsx
 Lampiran 5

MERSEYSIDE PROJECT
(With Inflation)
(Financial values in millions of British Pounds)

Assumptions :
Annual Output (metric tons) 250.000 Investment Outlay (mill.) - Plant 12
Output Gain/Original Output 7% Investment in Tank Cars 2
Price/ton (pounds sterling) 675 Discount rate 7%
Inflation (prices and costs) 3,00% Depreciable Life (years) Plant 15
Gross Margin (ex. Deprec.) 12,50% Depreciable Life (yrs.) Tank Cars 10
Old Gross Margin 11,50% Overhead/Investment 3,50%
Tax Rate 30% Salvage Value 0%
Energy Savings/Sales Yr. 1-5 1,25% WIP Inventory/Cost of Goods Sold 3%
Yr. 6-10 0,80% Months Downtime, Construction 1,50
Yr. 11-15 0,00% Preliminary Engineering Costs 0,50

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Year Now 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
1 Estimate of Incremental Gross Profit
New Output 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500 267.500
Lost Output--Construction
New Sales (Millions) 180,56 185,98 191,56 197,31 203,22 209,32 215,60 222,07 228,73 235,59 242,66 249,94 257,44 265,16 273,12
New Gross Margin 13,75% 13,75% 13,75% 13,75% 13,75% 13,30% 13,30% 13,30% 13,30% 13,30% 12,50% 12,50% 12,50% 12,50% 12,50%
New Gross Profit 24,83 25,57 26,34 27,13 27,94 27,84 28,67 29,54 30,42 31,33 30,33 31,24 32,18 33,15 34,14

Old Output 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000
Old Sales 168,75 173,81 179,03 184,40 189,93 195,63 201,50 207,54 213,77 220,18 226,79 233,59 240,60 247,82 255,25
Old Gross Profit 19,41 19,99 20,59 21,21 21,84 22,50 23,17 23,87 24,58 25,32 26,08 26,86 27,67 28,50 29,35
Incremental Gross Profit 5,42 5,58 5,75 5,92 6,10 5,34 5,50 5,67 5,84 6,01 4,25 4,38 4,51 4,65 4,79

2 Estimate of Incremental WIP Inventory

New WIP Inventory 4,67 4,81 4,96 5,11 5,26 5,44 5,61 5,78 5,95 6,13 6,37 6,56 6,76 6,96 7,17
Old WIP Inventory 4,48 4,61 4,75 4,90 5,04 5,19 5,35 5,51 5,68 5,85 6,02 6,20 6,39 6,58 6,78
Incremental WIP Inventory 0,19 0,20 0,20 0,21 0,22 0,25 0,26 0,27 0,27 0,28 0,35 0,36 0,37 0,38 0,39

3 Estimate of Incremental Depreciation

+ New Depreciation-Plant 1,60 1,39 1,20 1,04 0,90 0,78 0,68 0,59 0,32 0,32 0,32 0,32 0,32 0,32 0,32
+ New Depreciation, Tank Cars 0,40 0,32 0,26 0,20 0,16 0,13 0,10 0,08 0,17 0,17 0,00 0,00 0,00
Total Change in Depreciation 1,60 1,39 1,60 1,36 1,16 0,99 0,84 0,72 0,42 0,40 0,49 0,49 0,32 0,32 0,32
4 Overhead 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42
5 Prelim. Engineering Costs 0,50
6 Pretax Incremental Profit 2,90 3,78 3,73 4,14 4,52 3,94 4,24 4,53 4,99 5,19 3,34 3,47 3,77 3,91 4,05
7 Tax Expense 0,87 1,13 1,12 1,24 1,36 1,18 1,27 1,36 1,50 1,56 1,00 1,04 1,13 1,17 1,21
8 After-tax Profit 2,03 2,64 2,61 2,90 3,17 2,75 2,97 3,17 3,50 3,63 2,34 2,43 2,64 2,73 2,83

9 Cash Flow Adjustments

Add back Depreciation 1,60 1,39 1,60 1,36 1,16 0,99 0,84 0,72 0,42 0,40 0,49 0,49 0,32 0,32 0,32
Added WIP inventory 0,19 -0,01 -0,01 -0,01 -0,01 -0,03 -0,01 -0,01 -0,01 -0,01 -0,07 -0,01 -0,01 -0,01 -0,01
Capital Investment -12,00 -2,00

Free
10 Cash Flow -12,00 3,82 4,02 2,21 4,26 4,32 3,71 3,80 3,88 3,91 4,03 2,76 2,91 2,95 3,04 3,14

AVG Annual Add to EPS = 0,030

PAYBACK (years) = 3,50
NPV = 20,63
IRR = 30,01%