Victoria Chemicals (a)

Executive Summary

Being a major competitor in the worldwide chemicals industry Victoria Chemicals is trying to keep up with modern productions. Top managers of Victoria Chemicals are indecisive in on the cost of completely updating one of their plants to modernize the company. Our team has analyzed the Greystock's DCF Analysis on Exhibit 2 and has come across some errors we believe are essential for the company to take into consideration to make the final decision. Our team has reanalyzed Greystock's DCF Analysis and has included the following assumptions:

* Take into consideration the 3% inflation because the previous analysis did not consider it. It is essential to take inflation into consideration because in an investment it is susceptible to the systematic risk which is comprised partly of inflation.

* Increase the discount rate to 13% because it should include the inflation which hedges against the increases in prices that that minimizes our return.

* The engineering cost of GBP500,000 should not be included in the 1st year of cash flows because it is a sunk cost. Sunk cost should not be included in an NPV analysis calculation.

* Overhead/Investment was increased from 3.5% to 4.5% to allow for anticipated complications in the production process which would result in increases in cost.

* Lastly we also assume that the investment will still have a 0.1% energy savings in the last five years.

Our team believes that it is important to take into consideration the concerns of other members of the Victorian Chemicals management team. Based on our recalculation of Greystock's DCF analysis our team recommends that Victoria Chemicals accept the cost of upgrading one of their plants to modernize the company.

After adjusting the assumptions to include the necessary inputs we believed were important to recalculate the four investment criterions; which were, the NPV, IRR, PBP, and EPS. After the made adjustments the investment still passed all of the Victorian Chemical company's four investment criteria's. The NPV value decreased mainly because we took into consideration a 3% inflation, but still above GBP10 million. Although we find the IRR irrelevant the change was an increase of 3%, the IRR is still high which means that the investment will be profitable and should be undertaken. The payback period is 6 months faster than projected payback period of Greystock's original analysis. Lastly, out of the 15-year projected cash flow we had an average of 6 cents per year for the Earnings per Share, which is significantly higher than the original projection.