Diamond Chemicals Public Limited Corporation Harvard Case Solution & Analysis

Comparison Effects

The Comparative Effects show in term of value of the net present value, internal rate of return, payback period and expected earnings per share of Merseyside is a thirteen point nine British pounds, twenty six point two seven percent, three point six seven which is almost around to four years and $0.03 respectively. On the other hand, Rotterdam has the net present value, internal rate of return, payback period and expected earnings per share is ten point sixty one British pound, fourteen point ninety seven percent, 8.46 years and 0.04 British pounds respectively. These comparisons show that Merseyside has a better potential with all aspects of the financial management.

Rankings

The ranking is based on their above analysis done and the data are provided in the excel sheet with having the name of M.P and R.P which means that Merseyside Potentiality and Rotterdam Potentiality. The first ranked is to move toward the Merseyside because of their efficient criteria of the project. Furthermore, the analysis shows their key features which also are depicted in the excel sheet. Rrefer the excel sheet for understanding all the calculations and their effects with respect to the financial viability.

Comments

The suggestion is done on the basis of the ranking, giving on the above heading and the support of the financial ends. This is basic conclusion which is also given on the recommendation of this report.

3. Why don’t the various investment criteria to rank the two projects identically? Explain this in terms of the crossover problem in capital investment evaluation.

Answer 3

There are many criteria in the investment which do not comply the position of the same project. Those criteria are the economic conditions, terms and conditions of the project, cash flow natures, time periods, discounted rate, political condition, initial investment, terminal values and technological enhancement, etc. these are the basic criteria which do not comply the position of the same project investments.

Crossover Problems in Capital Investments

The crossover problem is the internal rate problem when it comes to the technique of net present value. Because the internal rate of return extracts the criteria of breakeven point which is not suitable for the decision. For the solution of this internal rate of return, the company can evaluate the project through the profitability index, which means that’s the present value of cash inflows divided by the present value of cash outflows. Basically, it gives the ranking position for the project appraisal.

4. What should one do when IRR and NPV disagree in ranking mutually exclusive projects?

Answer 4

Disagreement in Ranking of Mutually Exclusive Projects

Net present value (NPV) and Internal rate of return (IRR) sometimes disagree with the decision of the project that whether to accept the project or reject the project. If the disagreement with the decision arises then the viability of the project is considered on the basis of the net present value (NPV) of the project as compared to the internal rate of return, as net present value of the free cash flows includes all the cash inflows and cash outflows of the project as compared to internal rate of return IRR which calculates the percentage at which the net present value (NPV) of all the cash inflows and cash outflows become zero.

The net present value (NPV) and internal rate of return (IRR) of mutually exclusive projects give the difference in the decision to undertake the project due to certain factors that is may be due to the change in cash flows of the projects, the initial investment and terminal value differences of both the projects, terms and conditions of the both the projects also varies, and different project have different expected life. These conditions in the mutually exclusive projects may lead to variation in the decision that whether to accept the project or reject.

5. What do you make of Fawn’s concern about “flexibility”? Can we deal with that analytically and, if so, what is its effect on the value of the Merseyside project? What about the Rotterdam project?

Answer 5

Flexibility

The flexibility reflects the managerial problem solution with respect to the capital investment proposals. Basically, flexibility shows the strategic matters of the investments.  It helped out the management commitment due to the financial matters.  Furthermore, its impact on the present value of the cash flows with respect to the strategic decision. The total value of the project is calculated by adding the present value of free cash flow of the project to the present value of the flexibility commitment of the project.  Moreover, it extracts out the soft potential area with respect to the capital investment as well as a key factor of the investment...................................

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