Victoria Chemicals Plc (a): The Merseyside Project

Abstract

This case series considers the capital-investment decisions to be made by executives of a large chemicals firm in January 2008. The A case presents a go/no-go project evaluation regarding improvements to a polypropylene production plant. The B case (UVA-F-1544) reviews the same project but from one level higher, where the executives face an either/or investment decision between two mutually exclusive projects.

Excerpt

UVA-F-1543

Rev. Apr. 6, 2016

Victoria Chemicals PLC (A): The Merseyside Project

Late one afternoon in January 2008, 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 Victoria Chemicals' Merseyside Works in Liverpool, England. Her controller, Frank Greystock, was discussing a capital project that Morris wanted to propose to senior management. The project consisted of a GBP12 million expenditure to renovate and rationalize the polypropylene production line at the Merseyside plant in order to make up for deferred maintenance and to exploit opportunities to achieve increased production efficiency.

Victoria Chemicals was under pressure from investors to improve its financial performance because of the accumulation of the firm's common shares by a well-known corporate raider, Sir David Benjamin. Earnings had fallen to 180 pence per share at the end of 2007 from around 250 pence per share at the end of 2006. Morris thus believed that the time was ripe to obtain funding from corporate headquarters for a modernization program for the Merseyside Works—at least she had believed this until Greystock presented her with several questions that had only recently surfaced.

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Keywords: capital budgeting, cash flows, capital investment, relevant costs