Victoria Chemicals

Case Study Week 3 - Victoria Chemicals PLC

1. What changes, if any, should the plant manager (Morris) ask the financial controller (Greystock) to make to his analysis?

Morris should ask the Financial Controller to the make the following changes to his analysis:

* Include the cost of the rolling stock. These would become an essential asset of the Merseyside Works. The investment to occur in 2010 and then depreciated over the following 10 years. These would become an asset of the Merseyside works.

* Ignore the requests of the Director of Sales. The assumption is that Victoria Chemicals uses consolidated financial accounting in that they will consolidate the books of both Rotterdam and Merseyside. The impact of cannibalisation will be picked up in these consolidated accounts and will either generate revenue or a loss. Either way the proposed changes will be assessed at consolidation. VC must continue to innovate in both locations to improve overall value.

* VC Merseyside should not proceed with the inclusion of the upgrade to the EPC production line. The original justification was rejected on the basis of economic reasons i.e. a negative NPV. The inclusion of this project would dilute the overall project investment returns and would therefore not add value to the business. Equally, the product operates in a declining market slowly being replaced by alternative synthetics rubber compounds.

The question of possible future layoffs decision should not form part of the decision making process. The business has a responsibility to its stakeholders to maximise returns and to improve its overall competitiveness and sustainability.

There is also a clear conflict of interest with the assistant plant manager promoting the project for his own personal gain. This should play no part in the investment decision.

* Adjust the discount rate to take into account the effect of 3% inflation.

a. What should she do with the comments from:

i. Transport Division

Issue? Due to increased throughput, division would have to increase allocation of tank cars to the Merseyside Works. Therefore, £2m would need to be invested in 2010 to facilitate the additional volume. Depreciable life of 10years. This should be included in capital outlay.

ii. Director of Sales

Cannibalisation of Rotterdam to get rid of excess at Mersey. Cannot take the approach of not undertaking appropriate investment projects if it disadvantages another division of the company. The individual operations have a responsibility to operate as efficiently as possible to return maximum value to the stakeholders. It is highly likely that any incremental business would come from other competing plants