Case Analysis:VICTORIA CHEMICALS PLC (A): THE MERSEYSIDE PROJECT Harvard Case Solution & Analysis

Problem Statement

The company was facing a lot of financial problems and it was pressurized from its major shareholders as the company’s EPS was declining and fell to 180 pence from 250 pence in the last year.In addition,the company was facing issues in its manufacturing facilities, which were that the plant was running at its capacity and that the plant was made in late 60’s.Also, the plant was not fully automated due to this the company was unable to fulfill the demand as well as the inefficiencies were leading the company towards low profitability.

The plant’s manager proposed a project of 12 million pounds to expand its plant facilities in order to produce goods at a lower cost and to reduce the overhead and labor cost, since the competitors were producing the same goods at lower prices and the recession was leading the customers to purchase products at lower prices.Moreover, the company was working as a supplier to the major suppliers of polypropylene in the industry.
The manager of the plant assumed that the company will face a cost of 12 million and the facility will have to be shut down for 45 days, which would have a significant cost.She also said that the company would bear less overheads and maintenance cost after the installation of the new plant or the expansion of the plant.The other consideration regarding the financial analysis and the factors regarding the project will be discussed in the study later on.

Financial Analysis

By looking at the process of the financial analysis of the project, then the initial outlay of the project is 12 million and also the calculations of the IRR and NPV will be calculated.

We have made analysis by considering the following factors
• Inflationary Factor
• Cannibalization effect

First we discuss the feasibility as per the inflationary effects and then the cannibalization effect and what should the company do after considering the project.
Inflationary Factor

As we made calculations on the assumptions of the inflation factor and the given rate of inflation rate, which is 3%, therefore we have the facts and figures that suggest that the net present value of the project after its completion of 15 years useful life is 90 million, which was discounted at a rate of 10%.Moreover, the internal rate of return indicates that the rate of 24% after its useful life of 15 years is a good return while all the concerns regarding the required rate of return have been fulfilled.

In addition, the factors concerning the loss of shutting down the facility are being covered by the tremendous performance of the project.Moreover, it will give a higher amount of return in the future.......................

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