DIAMOND CHEMICALS PLC (A):

THE MERSEYSIDE PROJECT

HimanshuDubey
Kavya R
Manu Prasad

FT1730
30
FT1730
45
FT1730

MehakMalhan
Nishant Singh
Nitesh Mishra
PrateikSadarangan
i

51
FT1730
52
FT1730
58
FT1730
59
FT1730
64

Introduction:
Morris was plant manager of Diamond 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) 9-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.
Diamond Chemicals was under pressure from investors to improve its
financial performance, Earnings per share had fallen to 30.00 at the end
of 2000 from around 60.00 at the end of 1999.
Morris thus believed that the time was ripe to obtain funding from
corporate headquarters for a modernization program for the Merseyside
Worksat least she had believed so until Greystock presented her with
several questions that had only recently surfaced.

Initial DCF analysis:Assumptions

Annual Output (Metric Tons)
Output Gain/Original Output
Price/ton (ounds)
Inflation Rate (prices and
costs)
Gross Margin (ex. Deprec.)
Old Gross Margin
Tax Rate
Investment Outlay
Energy Savings/Sales

250000
7%
541

Yr. 1-5
Yr. 6-10
Yr. 1115

0.0%
12.50%
11.50%
30.0%
900000
0
1.25%
0.75%
0.00%

Discount Rate
Depreciable Life (in Years)
Overhead/Investment
Salvage Value
Wip Inventory/Cost of Goods
Months Downtime, Construction
After-tax Scrap Proceeds
Preliminary Engineering Costs

Year
Estimat
e of
Increm
ental
Gross
Profit

New
Output
(tons)
Loss
Output
-Constru
ction

New
Sales
(Millions
)
New
Gross
Margin
New
Gross

N
o
w

1
2
0
0
1

2
2
0
0
2

2
6
7
5
0
0
3
3
4
3
8
1
2
6
6
2
7
8
1
3
1
3.
7
5
%
1
7

2
6
7
5
0
0

1
4
4
7
1
7
5
0
0
1
3.
7
5
%
1
9

10.00%
15
3.50%
0
3.00%
1.5
0.00%
500000

20
03

4
2
0
0
4

5
2
0
0
5

6
2
0
0
6

7
2
0
0
7

8
2
0
0
8

9
2
0
0
9

1
0
2
0
1
0

1
1
2
0
1
1

1
2
2
0
1
2

1
3
2
0
1
3

26
75
00

2
6
7
5
0
0

2
6
7
5
0
0

2
6
7
5
0
0

2
6
7
5
0
0

2
6
7
5
0
0

2
6
7
5
0
0

2
6
7
5
0
0

2
6
7
5
0
0

2
6
7
5
0
0

2
6
7
5
0
0

1
4
4
7
1
7
5
0
0
1
3.
7
5
%
1
9

1
4
4
7
1
7
5
0
0
1
3.
7
5
%
1
9

1
4
4
7
1
7
5
0
0
1
3.
2
5
%
1
9

1
4
4
7
1
7
5
0
0
1
3.
2
5
%
1
9

1
4
4
7
1
7
5
0
0
1
3.
2
5
%
1
9

1
4
4
7
1
7
5
0
0
1
3.
2
5
%
1
9

1
4
4
7
1
7
5
0
0
1
3.
2
5
%
1
9

1
4
4
7
1
7
5
0
0
1
2.
5
0
%
1
8

1
4
4
7
1
7
5
0
0
1
2.
5
0
%
1
8

1
4
4
7
1
7
5
0
0
1
2.
5
0
%
1
8

14
47
17
50
0
13
.7
5
%
19
89

1
4
2
0
1
4

1
5
2
0
1
5

2
6
7
5 26
0 75
0 00

1
4
4
7
1
7
5
0
0
1
2.
5
0
%
1
8

14
47
17
50
0
12
.5
0
%
18
08

Profit

Old
Output

Old
Sales

Old
Gross
Profit

Increme
ntal
Gross
Profit

4
1
1
3
2
4

8
9
8
6
5
6

2
5
0
0
0
0
1
3
5
2
5
0
0
0
0
1
5
5
5
3
7
5
0
1
8
5
7
5
7
4

2
5
0
0
0
0
1
3
5
2
5
0
0
0
0
1
5
5
5
3
7
5
0
4
3
4
4
9
0
6

1
2
0
0
0
0
0
3
1

1
0
4
0
0
0
0
3
1

8
9
8
6
5
6

8
9
8
6
5
6

1
7
5
0
6
9

1
7
5
0
6
9

1
7
5
0
6
9

1
7
5
0
6
9

1
7
5
0
6
9

0
8
9
6
8
8

0
8
9
6
8
8

0
8
9
6
8
8

0
8
9
6
8 96
8 88

43
44
90
6

2
5
0
0
0
0
1
3
5
2
5
0
0
0
0
1
5
5
5
3
7
5
0
4
3
4
4
9
0
6

2
5
0
0
0
0
1
3
5
2
5
0
0
0
0
1
5
5
5
3
7
5
0
4
3
4
4
9
0
6

2
5
0
0
0
0
1
3
5
2
5
0
0
0
0
1
5
5
5
3
7
5
0
3
6
2
1
3
1
9

2
5
0
0
0
0
1
3
5
2
5
0
0
0
0
1
5
5
5
3
7
5
0
3
6
2
1
3
1
9

2
5
0
0
0
0
1
3
5
2
5
0
0
0
0
1
5
5
5
3
7
5
0
3
6
2
1
3
1
9

2
5
0
0
0
0
1
3
5
2
5
0
0
0
0
1
5
5
5
3
7
5
0
3
6
2
1
3
1
9

2
5
0
0
0
0
1
3
5
2
5
0
0
0
0
1
5
5
5
3
7
5
0
3
6
2
1
3
1
9

2
5
0
0
0
0
1
3
5
2
5
0
0
0
0
1
5
5
5
3
7
5
0
2
5
3
5
9
3
8

2
5
0
0
0
0
1
3
5
2
5
0
0
0
0
1
5
5
5
3
7
5
0
2
5
3
5
9
3
8

2
5
0
0
0
0
1
3
5
2
5
0
0
0
0
1
5
5
5
3
7
5
0
2
5
3
5
9
3
8

2
5
0
0
0
0
1
3
5
2
5
0
0
0
0
1
5
5
5
3
7
5
0
2
5
3
5
9
3
8

90
13
33
31
50

7
8
1
1
5
6
3
1

6
7
7
0
0
1
3
1

5
8
6
7
3
5
3
1

5
0
8
5
0
3
3
1

4
4
0
7
0
3
3
1

3
8
1
9
4
3
3
1

3
3
1
0
1
7
3
1

4
3
0
3
2
2
3
1

4
3
0
3
2
2
3
1

4
3
0
3
2
2
3
1

4
3
0
3
2
2
3
1

86
56
.2
5

25
00
00

13
52
50
00
0

15
55
37
50

25
00
00

13
52
50
00
0

15
55
37
50

25
35
93
8

Estimat
e of
Increm
ental
Deprec
iation

New
Depreci
ation
Overhea
d

43
03
22
31
50

Prelim.E
ngineeri
ng
Costs

Pretax
Increme
ntal
Profit

Tax
Expense

After-tax
Profit
Cash
Flow
Adjust
ments

Less
Capital
Expendi
tures

Add
back
Depreci
ation
Less
Added
WIP
Inventor

5
0
0
0
5
0
0
0
0
0
1
5
7
4
2
6

5
0
0
0

4
7
2
2
8
1
1
0
1
9
8

8
9
6
9
7
2
2
0
9
2
9
3
4

1
2
0
0
0
0
0
3
1
0
0

1
0
4
0
0
0
0
4
7
0

2
9
8
9
9
0
6

00

5
0
0
0

5
0
0
0

5
0
0
0

5
0
0
0

5
0
0
0

5
0
0
0

5
0
0
0

5
0
0
0

5
0
0
0

5
0
0
0

5
0
0
0 00

31
28
57
3

3
2
4
8
7
5
1

2
7
1
9
5
8
4

2
7
9
7
8
1
5

2
8
6
5
6
1
6

2
9
2
4
3
7
6

2
9
7
5
3
0
2

1
7
9
0
6
1
6

1
7
9
0
6
1
6

1
7
9
0
6
1
6

1
7
9
0 17
6 90
1 61
6
6

21
90
00
1

9
7
4
6
2
5
2
2
7
4
1
2
5

3
3
5
2
9
0
5
1
0
0
5
8
7
1
2
3
4
7
0
3
3

8
1
5
8
7
5
1
9
0
3
7
0
9

8
3
9
3
4
5
1
9
5
8
4
7
1

8
5
9
6
8
5
2
0
0
5
9
3
1

8
7
7
3
1
3
2
0
4
7
0
6
3

8
9
2
5
9
1
2
0
8
2
7
1
1

5
3
7
1
8
5
1
2
5
3
4
3
1

5
3
7
1
8
5
1
2
5
3
4
3
1

5
3
7
1
8
5
1
2
5
3
4
3
1

5
3
7
1
8
5
1
2
5
3
4
3
1

90
13
33
0

7
8
1
1
5
6
0

6
7
7
0
0
1
0

5
8
6
7
3
5
0

5
0
8
5
0
3
0

4
4
0
7
0
3
0

3
8
1
9
4
3
0

3
3
1
0
1
7
0

4
3
0
3
2
2
0

4
3
0
3
2
2
0

4
3
0
3
2
2
0

4
3
0
3 43
2 03
2 22
0
0

93
85
72

53
71
85

12
53
43
1

9
0
0
0
0
0
0

0
0

y
After-tax
Scrap
Proceed
s

Free
Cash
Flow

0
0
0

0
9
0
0
0
0
0
0

1
3
9
9
8
0
2

2
6
6
2
9
3
4

30
91
33
4

3
0
5
5
2
8
1

3
0
2
4
0
3
5

2
4
9
0
4
4
4

2
4
6
6
9
7
4

2
4
4
6
6
3
4

2
4
2
9
0
0
6

2
4
1
3
7
2
8

1
6
8
3
7
5
3

1
6
8
3
7
5
3

1
6
8
3
7
5
3

1
6
8
3 16
7 83
5 75
3
3

Objective: To evaluate Frank Greystocks DCF Analysis of the Merseyside

project, impacts to related departments, and overall appeal of the project
to the Diamond enterprise.
Though the project shows a highly positive NPV and meets all the
investments criteria, there are some issues:
1. The production line would have to be shut down for 45 days during
which customers would buy from competitors. Basically, there is an
initial construction downtime.
2. The project would require the parent companys Transport Division
to invest 2 mn pounds which the controller refuses to add in her own
projects outlay.
3. The marketing department is sceptical about sales figures due to
the ongoing recession. The marketing team is concerned about
cannibalization. Cannibalization really isnt a cash flow; there is no
check written in this instance. Anyway, if the company starts
burdening its cost-reduction projects with fictitious charges like this,
the cost competitiveness wont be maintained.
4. The assistant plant manager wants the controller to include an EPC
project as a part of the overall project.
5. A Treasury analyst says the discount rate used is incorrect.
Additionally, the treatment of engineering costs is incorrect. The
controller at Diamond Chemicals Merseyside Works wants a project
consisting of a 9 mn pounds outlay to be passed that would achieve
increased production capacity.

Resolving the issues:Issue 1: Though this is true, there is reason to believe that the customers
will come back due to the cost efficiency of Diamond Chemicals as shown
below:

Diamond Chemicals cost competitiveness will only increase after the

completion of the project and it will thrive in the highly competitive
market.
Issue 2: The Transport Divisions concerns are also well-established and
this outlay should be included in the total investment for the project,
making it 11 mn pounds.
Issue 3: The concerns of the marketing department are well-established
and need to be addressed. Due to the shutdown for 45 days, there would
be customer losses for some time as not all customers will be back soon
and adjustment needs to be made for that. I have accounted for this loss
to be the same as the expense due to lost output during the 45 days.
Regarding sales, it would be the task of the marketing department to drive
the sales. We can be optimistic on that front as the market will revive
even though the recession may persist for long.
Issue 4: The plant manager wants the EPC project to be included because
of its potential strategic advantages. This is a classic corporate
malpractice wherein an unrelated project is obscured and pushed along an
attractive one. Anyways, the plant managers views need to be taken with
a pinch of salt considering that the EPC market has contracted in the past
few years due to new substitutes. The project, thus, should not be
undertaken. Rather, Merseyside Works should start planning on creating
new opportunities to prevent layoffs.
Issue 5: The discount rate currently used in evaluating the project is 10%.
However, its the nominal rate but the cash flows are real. Hence, the
discount rate used should be adjusted for inflation, which is 3%. Hence,
the new discount rate used is 7%.

Preliminary engineering costs of 0.5 mn have been spend on the efficiency

and design studies of the renovation and are thus a sunk cost. Hence,
these costs should not be included in the analysis.

Suggested changes:
Assumptions:
Annual Output (Metric Tons)
Output Gain/Original Output
Price/ton (ounds)
Inflation Rate (prices and
costs)
Gross Margin (ex. Deprec.)
Old Gross Margin
Tax Rate
Investment Outlay
Energy Savings/Sales

250000
7%
541
3.0%
12.50%
11.50%
30.0%
11000000
1.25%
0.75%

Yr. 1-5
Yr. 6-10
Yr.
1115
0.00%

Discount Rate
Depreciable Life (in Years)
Overhead/Investment
Salvage Value
Wip
Inventory/Cost
of
Goods
Months
Downtime,
Construction
After-tax Scrap Proceeds
Preliminary
Engineering
Costs
Depreciable Life - Tank (in
Years)

Year
Estimat
e
of
Increm
ental
Gross
Profit

N
o
w

1
2
0
0
1

2
2
0
0
2

3
2
0
0
3

4
2
0
0
4

5
2
0
0
5

6
2
0
0
6

7
2
0
0
7

8
2
0
0
8

7.0%
15
3.50%
0
3.00%
1.5
0.00%
500000
10.00%

9
2
0
0
9

1
0
2
0
1
0

1
1
2
0
1
1

1
2
2
0
1
2

1
3
2
0
1
3

1
4
2
0
1
4

1
5
2
0
1
5

New
Output
(tons)
Loss
Output
-Constru
ction

New
Sales
(Millions
)
New
Gross
Margin

New
Gross
Profit

Old
Output

Old
Sales
Old
Gross
Profit

2
6
7
5
0
0
3
1
2
5
0
1
2
7
8
1
1
2
5
0
1
3.
7
5
%
1
7
5
7
4
0
4
7

2
6
7
5
0
0

2
6
7
5
0
0

2
6
7
5
0
0

2
6
7
5
0
0

2
6
7
5
0
0

2
6
7
5
0
0

2
6
7
5
0
0

2
6
7
5
0
0

2
6
7
5
0
0

2
6
7
5
0
0

2
6
7
5
0
0

2
6
7
5
0
0

2
6
7
5
0
0

1
4
4
7
1
7
5
0
0
1
3.
7
5
%
1
9
8
9
8
6
5
6

1
4
4
7
1
7
5
0
0
1
3.
7
5
%
1
9
8
9
8
6
5
6

1
4
4
7
1
7
5
0
0
1
3.
7
5
%
1
9
8
9
8
6
5
6

1
4
4
7
1
7
5
0
0
1
3.
7
5
%
1
9
8
9
8
6
5
6

1
4
4
7
1
7
5
0
0
1
3.
2
5
%
1
9
1
7
5
0
6
9

1
4
4
7
1
7
5
0
0
1
3.
2
5
%
1
9
1
7
5
0
6
9

1
4
4
7
1
7
5
0
0
1
3.
2
5
%
1
9
1
7
5
0
6
9

1
4
4
7
1
7
5
0
0
1
3.
2
5
%
1
9
1
7
5
0
6
9

1
4
4
7
1
7
5
0
0
1
3.
2
5
%
1
9
1
7
5
0
6
9

1
4
4
7
1
7
5
0
0
1
2.
5
0
%
1
8
0
8
9
6
8
8

1
4
4
7
1
7
5
0
0
1
2.
5
0
%
1
8
0
8
9
6
8
8

1
4
4
7
1
7
5
0
0
1
2.
5
0
%
1
8
0
8
9
6
8
8

1
4
4
7
1
7
5
0
0
1
2.
5
0
%
1
8
0
8
9
6
8
8

2
5
0
0
0
0
1
3
5
2
5
0
0
0
0
1
5
5
5
3

2
5
0
0
0
0
1
3
5
2
5
0
0
0
0
1
5
5
5
3

2
5
0
0
0
0
1
3
5
2
5
0
0
0
0
1
5
5
5
3

2
5
0
0
0
0
1
3
5
2
5
0
0
0
0
1
5
5
5
3

2
5
0
0
0
0
1
3
5
2
5
0
0
0
0
1
5
5
5
3

2
5
0
0
0
0
1
3
5
2
5
0
0
0
0
1
5
5
5
3

2
5
0
0
0
0
1
3
5
2
5
0
0
0
0
1
5
5
5
3

2
5
0
0
0
0
1
3
5
2
5
0
0
0
0
1
5
5
5
3

2
5
0
0
0
0
1
3
5
2
5
0
0
0
0
1
5
5
5
3

2
5
0
0
0
0
1
3
5
2
5
0
0
0
0
1
5
5
5
3

2
5
0
0
0
0
1
3
5
2
5
0
0
0
0
1
5
5
5
3

2
5
0
0
0
0
1
3
5
2
5
0
0
0
0
1
5
5
5
3

2
5
0
0
0
0
1
3
5
2
5
0
0
0
0
1
5
5
5
3

2
5
0
0
0
0
1
3
5
2
5
0
0
0
0
1
5
5
5
3

26
75
00

14
47
17
50
0
12
.5
0
%

18
08
96
88

25
00
00

13
52
50
00
0
15
55
37
50

Increme
ntal
Gross
Profit

7
5
0
2
0
2
0
2
9
7

7
5
0
4
3
4
4
9
0
6

7
5
0
4
3
4
4
9
0
6

7
5
0
4
3
4
4
9
0
6

7
5
0
4
3
4
4
9
0
6

7
5
0
3
6
2
1
3
1
9

7
5
0
3
6
2
1
3
1
9

7
5
0
3
6
2
1
3
1
9

7
5
0
3
6
2
1
3
1
9

7
5
0
3
6
2
1
3
1
9

7
5
0
2
5
3
5
9
3
8

7
5
0
2
5
3
5
9
3
8

7
5
0
2
5
3
5
9
3
8

7
5
0
2
5
3
5
9
3
8

25
35
93
8

1
2
0
0
0
0
0

1
0
4
0
0
0
0

7
8
1
1
5
6
3
2
0
0
0
0
3
8
5
0
0
0

6
7
7
0
0
1
2
5
6
0
0
0
3
8
5
0
0
0

5
8
6
7
3
5
2
0
4
8
0
0
3
8
5
0
0
0

5
0
8
5
0
3
1
6
3
8
4
0
3
8
5
0
0
0

4
4
0
7
0
3
1
3
1
0
7
2
3
8
5
0
0
0

3
8
1
9
4
3
1
0
4
8
5
8
3
8
5
0
0
0

3
3
1
0
1
7

4
3
0
3
2
2
1
6
7
7
7
2
3
8
5
0
0
0

4
3
0
3
2
2

43
03
22

8
3
8
8
6
3
8
5
0
0
0

4
3
0
3
2
2
1
6
7
7
7
2
3
8
5
0
0
0

4
3
0
3
2
2

3
8
5
0
0
0

9
0
1
3
3
3
4
0
0
0
0
0
3
8
5
0
0
0

3
8
5
0
0
0

3
8
5
0
0
0

38
50
00

2
9
1
9
9
0
6
8
7
5
9
7
2

2
6
5
8
5
7
3
7
9
7
5
7
2

2
8
5
8
7
5
1
8
5
7
6
2
5

3
0
2
6
9
0
5
9
0
8
0
7
1

2
4
4
4
7
8
4
7
3
3
4
3
5

2
5
6
3
9
7
5
7
6
9
1
9
3

2
6
6
4
5
4
4
7
9
9
3
6
3

2
7
4
9
5
1
9
8
2
4
8
5
6

2
8
2
1
4
1
6
8
4
6
4
2
5

1
5
5
2
8
4
3
4
6
5
8
5
3

1
5
5
2
8
4
3
4
6
5
8
5
3

1
7
2
0
6
1
6
5
1
6
1
8
5

1
7
2
0
6
1
6
5
1
6
1
8
5

Estimat
e
of
Increm
ental
Deprec
iation

New
Depreci
ation
New
Depreci
ationTank

Overhea
d
Prelim.E
ngineeri
ng
Costs

Pretax
Increme
ntal
Profit

Tax
Expense

3
8
5
0
0
0

0
4
3
5
2
9
7
1
3
0
5
8
9

17
20
61
6

51
61
85

After-tax
Profit
Cash
Flow
Adjust
ments

Less
Capital
Expendi
tures

2
0
4
3
9
3
4

1
2
0
0
0
0
0

1
0
4
0
0
0
0

1
8
6
1
0
0
1

2
0
0
1
1
2
5

2
1
1
8
8
3
3

1
7
1
1
3
4
9

1
7
9
4
7
8
3

1
8
6
5
1
8
1

1
9
2
4
6
6
3

1
9
7
4
9
9
1

1
0
8
6
9
9
0

1
0
8
6
9
9
0

1
2
0
4
4
3
1

1
2
0
4
4
3
1

9
0
1
3
3
3
4
0
0
0
0
0

7
8
1
1
5
6
3
2
0
0
0
0

6
7
7
0
0
1
2
5
6
0
0
0

5
8
6
7
3
5
2
0
4
8
0
0

5
0
8
5
0
3
1
6
3
8
4
0

4
4
0
7
0
3
1
3
1
0
7
2

3
8
1
9
4
3
1
0
4
8
5
8

3
3
1
0
1
7

4
3
0
3
2
2
1
6
7
7
7
2

4
3
0
3
2
2

4
3
0
3
2
2

8
3
8
8
6

4
3
0
3
2
2
1
6
7
7
7
2

3
1
6
2
3
3
4

3
1
0
2
2
8
1

3
0
5
1
8
3
5

2
5
0
2
8
8
4

2
4
6
7
1
2
6

2
4
3
6
9
5
6

2
4
1
1
4
6
3

2
3
8
9
8
9
4

1
6
8
5
0
8
4

1
6
8
5
0
8
4

1
6
3
4
7
5
3

1
6
3
4
7
5
3

16
34
75
3

12
04
43
1

1
1
0
0
0
0
0
0

Add
back
Depreci
ation
Add
back
Depreci
ation Tank

0
3
1
0
0
0
0

Less
Added
WIP
Inventor
y
After-tax
Scrap
Proceed
s

Free
Cash
Flow

3
0
4
7
0
8

0
4
7
0
0
0
0

43
03
22

0
1
1
0
0
0
0
0
0

1
8
1
4
7
0
8

2
6
1
3
9
3
4

Impact on FCF, NPV and IRR:Original FCF

calculation
Year
FCF
0
-9
1
1.4
2
2.66
3
3.09
4
3.06
5
3.02
6
2.49
7
2.47
8
2.45
9
2.43
10
2.41
11
1.68
12
1.68
13
1.68
14
1.68
15
1.68

Suggested
FCF
calculation
Year
FCF
0
-11
1
1.14
2
2.66
3
3.09
4
3.06
5
3.02
6
2.49
7
2.47
8
2.45
9
2.43
10
2.41
11
1.68
12
1.68
13
1.68
14
1.68
15
1.68

NPV

NPV

IRR

8.99
25.92
%

IRR

10.07
20.09
%

Due to change in hurdle rate, NPV has gone up even though IRR has
reduced.

Conclusion
The project should be undertaken due to the following reasons:
It meets all investment criteria and contributes to the shareholder
value.
It is likely to introduce efficiency and result in the long run gain to
the organization.
With the new technology the organization is likely to benefit from
the returns to scale as well.