Case 20: Diamond Chemicals plc (A) --PT07 Group 10
Diamond Chemicals is a large worldwide chemicals producer with two factories in Liverpool England and Rotterdam Holland. Both of their plants were built in 1967 with annual output of 250,000 metric tons polypropylene. Compare with low-cost producer, the production cost per ton is 1.09 which is a little bit high than competitors (see Exhibition 1). With the decline EPS from ÃÂ£60 in 1999 to ÃÂ£30 in 2000 and worldwide economic slowdown, the controller of plant manager of Merseyside (Liverpool), Frank Greystock, bring a improvement project in order to make plant more efficiency, more output and save more energy.
Frank proposed an expenditure of ÃÂ£9 million to renovate and rationalize the polypropylene production line at Merseyside plant. This project would be in the engineering-efficiency category with 17,500 tons production increasing and following investment criteria: 1) Average annual addition to EPS = ÃÂ£0.018.
2) Payback period =3.6 years. 3) NPV=ÃÂ£9 million. 4) IRR=25.9%.
This project will take 45 days to shut down Merseyside plant and their customers have to buy from competitors since Rotterdam's plant was operating near capacity. After improvement, the output will increase 7% and gross margin will increase from 11.5% to 12.5% with a low energy requirement. But there are four major issues from inside and outside Merseyside plant:
Currently the transport division could make this allocation out of excess capacity, but doing so would accelerate from 2005 to 2003 the need to purchase new rolling stock to support the growth.
The director of sales argues that the industry is in a downturn and it looks like an oversupply is in the works. That means they have to shift capacity away from Rotterdam toward Merseyside. It is not really a gain for whole company. Marketing vice...