Diamond Chemicals Plc. – The Merseyside Project Harvard Case Solution & Analysis

Diamond Chemicals Plc. - The Merseyside Project Case Solution 

Introduction

Diamond chemicals is a leading chemical industry engaged in manufacturing of Polypropylene. Polypropylene is a type of strong polymer which is used in different other industries. The company has two plants one at Merseyside, Liverpool and another at Rotterdam, Holland. The production process at Merseyside is traditional, and the production is conducted in an old plant which was constructed in 1967. However, this plant lacks technological features as compared to the competitors. Morris is the plant manager, and Frank Grey stock is the controller of the plant.

A capital project is proposed by Morris to renovate and update the production process of the Merseyside project. This resulted in increased operating efficiency for the plant as well increase in production capacity. The project is estimated to have total cost of 9 million British pounds.

There were numerous issues raised about the proposed plan by different departments and related stakeholders. Moreover, the assumptions used in the projection of the project contain some inaccurate information. The initial outlay that is estimated to be 9 million pounds was objected by other department, which wants to revise this estimate. There were few errors in the projection that needs to be analyzed and corrected.

Current situation

The proposed project will improve the operations and production process as well as the redesign of the plant will result in less consumption of energy. Majorly three improvements are proposed to be made which include:

  • In order to reorganize the process flow in a way that brings efficiency in the production process, the tank car unloading areas will be relocated and modernized.
  • Polymerizations tanks will be refurbished and renovated so that it will provide more pressure and more throughputs.
  • Compounding plant will also be renovated to increase the extrusion and energy saving

Consequences of the Proposed Plan

Many other activities will be affected by the implementation of the proposed plan. The production line will be shut down for about 45 days,thus the company will not be able to provide product to its customer. In that case, the customers will buy the product from the competitors, however as per Grey stock the customers will come back as the production starts again. The plan after implementation will bring energy savings in the production process which will give about 7% greater manufacturing throughput. The gross margin will increase to 12.5% from the current ratio of 11.5%. Overall, the production process will become efficient, and production capacity will be increased.

The discounted cash flow is created to analyze the project and its feasibility. Based on which the NPV is calculated as 9 million pounds and IRR is calculated as 25.9%, which shows that the project is feasible for the company.

The assumptions that are used in the calculation of NPV are:

Assumptions        
Annual Output (metric tons)250,000Discount rate10.0%
Output Gain/Original Output7.0%Depreciable Life (years)15
Price/ton (pounds sterling)541Overhead/Investment3.5%
Inflation Rate (prices and costs)0.0%Salvage Value0
Gross Margin (ex. Deprec.)12.50%WIP Inventory/Cost of Goods3.0%
Old Gross Margin11.5%Months Downtime, Construction1.5
Tax Rate30.0%After-tax Scrap Proceeds0
Investment Outlay (mill.)9.00Preliminary Engineering Costs0.5
Energy Savings/SalesYr. 1-51.25% 
 Yr. 6-100.8% 
   Yr. 11-150.0%      

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