American Chemical Corporation Harvard Case Solution & Analysis

Financial Analysis

The net present value of the plant could be calculated by using free cash flows and it could be calculated by using with and without lamination technology. Calculations performed in excel sheet are based on with lamination technology. Initial cost of the plant is $12 million and for calculation with lamination technology additional $2.25 million are also taken as an initial investment.

american chemical corporation case solution

american chemical corporation case solution

In order to evaluate the project, the net present value of the project is calculated and for this purpose, the first five year projections are used from the case data and upon the first five years assumptions next five years data is identified. The calculations for next five years are based on with lamination technology and installation if the lamination technology would reduce the energy expense by 15 to 20%, therefore power cost is reduced by 15%.

By assuming that at the year 1984 the plant is running at full capacity,therefore for the next five years there would be sales of 38000 ton show ever, for revenue calculation selling price is expected to be increased by 8% each year. Other calculations for this purpose are calculated based on the last year’s average growth, hence operating profit is calculated. (Refer to the excel Sheet)

For free cash flow calculations, certain adjustments have been made such as adding back depreciation, net change in working capital adjustment and deduction of capital expenditure by assuming capital expenditure of $500,000 free cash flows have been calculated.

In order to determine the net present value of these cash flows, the weighted average cost of capital is calculated with the help of capital asset pricing model. By taking the long term treasury rate, assuming8.5% as a market risk premium and taking the beta of American chemical and considering it as a comparable company, the cost of equity is calculated,which is approximately 20%.

By taking the interest rate of both bonds the cost of debt is identified as 11.25% for weighted average cost of capital calculation. The value of debt and value of equity is identified by taking the target capital structure of 35% and 65% equity. By outing these values into the formula of weighted average cost of capital, the discount factor of the project is identified which is expected to be 15% approximately. By discounting free cash flows at this discount rate, the net present value of the project is identified, which is significantly positive.....................................

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