Diamond Chemicals Plc (a): The Merseyside Project

7 Pages Posted: 21 Oct 2008

See all articles by Robert F. Bruner

Robert F. Bruner

University of Virginia - Darden School of Business

Multiple version iconThere are 2 versions of this paper

Abstract

These two cases consider the capital investment decisions to be made by executives of this large chemicals firm in January 2001. The A case presents a go/no-go project evaluation regarding improvements to a polypropylene production plant. The B case reviews the same project but from one level higher, where the executive faces an either/or investment decision between two mutually exclusive projects. The objective of the two cases is to expose students to a wide range of capital-budgeting issues which includes, among others, the identification of relevant cash flows, the critical assessment of a capital investment evaluation system, the classic “cross-over” problem, in which project rankings disagree on the basis of net present value (NPV) and internal rate of return (IRR), and the assessment of real option value latent in managerial flexibility to change operating technologies.

Excerpt

UVA-F-1351

Rev. Apr. 30, 2015

Diamond Chemicals PLC (A): The Merseyside Project

Late one afternoon in January 2001, Frank Greystock told Lucy Morris, “No one seems satisfied with the analysis so far, but the suggested changes could kill the project. If solid projects like this can't swim past the corporate piranhas, the company will never modernize.”

Morris was plant manager of Diamond Chemicals PLC's Merseyside Works in Liverpool, England. Greystock, Diamond's controller, was referring to a capital project that Morris wanted to propose to senior management. The project consisted of a GBP9 million expenditure to renovate and rationalize the polypropylene production line at the Merseyside plant to make up for deferred maintenance and exploit opportunities to achieve increased production efficiency.

Diamond Chemicals was under pressure from investors to improve its financial performance because of both the worldwide economic slowdown and the accumulation of the firm's common shares by a well-known corporate raider, Sir David Benjamin. Earnings per share had fallen to GBP30.00 at the end of the year 2000 from around GBP60.00 at the end of 1999. Morris thus believed that the time was ripe to obtain funding from corporate headquarters for a modernization program for the Merseyside Works—or at least, she had believed so until Greystock presented her with several questions that had only recently surfaced.

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Keywords: capital budgeting, capital investment, relevant costs

Suggested Citation

Bruner, Robert F., Diamond Chemicals Plc (a): The Merseyside Project. Darden Case No. UVA-F-1351, Available at SSRN: https://ssrn.com/abstract=1279307 or http://dx.doi.org/10.2139/ssrn.1279307

Robert F. Bruner (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

HOME PAGE: http://faculty.darden.edu/brunerb/

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