Diamond Chemicals Public Limited Corporation Harvard Case Solution & Analysis

Case Summary

The Diamond Chemical Public Limited Corporation is very famous for large producers of its propylene. This product is running in the industry of the chemical which itself is a vast field of the world. The major business of the company is located in Europe. The organization is very famous about their product quality, but recently the top management has notified the low profitability in the organization because of the technological enhancement.  The enterprise has two proposals with having sound knowledge about their strength. The project is located in the field of Merseyside and Rotterdam with having different procedures. The main problem for the expansion is the technological changes in the environment. Furthermore, the company is also facing the issue of low growth under the current situation and for this problem company uses different techniques of the financial management. In the analysis, the company is evaluating four strategic approaches which are net present value, internal rate of return, payback period and earnings per share. Furthermore, in the analysis part, the net present value used the method of discounted cash flow and internal rate of return uses the method of trial and error method and in payback period there are two approaches one refers to discounted cash flow payback and the second is simple cash flow techniques.

The analysis is done with all aspects which are the main concern of the valuation. The results are in the favor of Merseyside because of the potentiality of the project’sFinancials. The net present value, internal rate of return, payback and expected earnings per share are in the support of Merseyside rather to Rotterdam. There are also some other factors which are important to consider in the decision of the capital investment is that the non- financial factors which may be the quality of the enterprise with the management assessment. The key role of the non-financial factor is to value the profit viability through the financial strength of that particular investment project.

The recommended solution is giving the green signal for the Merseyside, because the results are showing better net present value. The internal rate of return is twenty six point two seven percent, which is more than the Rotterdam net present value and internal rate of return. One of the best advantage is that the payback time on Merseyside is very short as compared with Rotterdam. For all these aspects the decision goes with Merseyside project, which is beneficial for the company in every matter.

1. Do you endorse Eustace’s analysis of the project at Rotterdam? How would you improve on it?

Answer 1

Highlights

The Eustace`s analysis of the project at Rotterdam is on the basis of different technique as well as all the management’s concernsabout it. The endorsement does not go with this project because of the low net present value in comparison to Merseyside project. It should improve the project through understanding of the excess capital expenditure. To curtail the excess expenditure burden it has to increase the cash flow of the project. In short this project has to re-engineer scope matters which are related to the financial health of that particular project. This analysis of the projectis done with some assumption and for the reason which is given in the case. For justifying these assumptions with the actual reality of the financial management and economic circumstances.

Reason

The reason for this calculation is to identify the key importance of this project, which are the core factors for extracting the optimal solution. Furthermore the assumption which follows on the analysis is the rate of discount is ten percent, which is in the normal course of routine, the tax rate is assumed to be the thirty percent, the depreciation is done on the straight line method with the useful life is fifteen years. Moreover, the inflation rate is three percent and expected growth of the revenues and the cost are twenty percent in the analysis which are given in the excel sheet. Please go through the excel file for developing the understanding of the project`s assumptions.

Comment

The final signal depicts the relationship of the analysis with respect to the financial management techniques is that the Rotterdam has not much significant effect with respect to the net present value of the project. Moreover, the internal rate of return is also lower as compared to the Merseyside rate. Because of the above mentioned reasons the decisiongoes with Merseyside and not with the Rotterdam project.

2. After eliminating the right-of-way cash flows at Rotterdam, how do the Merseyside and Rotterdam projects, compare financially and along other dimensions?

Answer 2

Highlights

After eliminating the right-of-way cash flows of the Rotterdam side, the results are still in the favor of the Merseyside. The assumption on the right-of-way was that it will increase the amountof thirty five million British poundsduring the period of fifteen years. Furthermore, the result after the right-of-way....................

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