The board needs to question a number of cash flow decisions made in the proposal by Morris. Namely; sunk costs, cannibalization, cash flows from unrelated projects and implication of future Capex programs for the transport division into the Merseyside project. There are also a number of conflicts of interest and other ethical dilemmas that arise in the case which need to be addressed in the assessment of the project. The board needs to take action, so the overall benefit of the company is the primary objective for management and especially for such significant investment decisions. On the basis of recognizing cash flows differently from original proposal, the …show more content…
It is clear these executives would be focused on making their areas of responsibility look good, which will have a detrimental effect on the overall company performance. The case also highlighted some fundamental areas of risk in decision making at Victoria Chemicals. VC expected they could close down the factory for 45 days and not supply their customers for that period, and them simply win them back after the shutdown. Customers would not be so easily won back. If VC could not make excess product in the lead up to the shut down due to capacity constraints, they would be better off buying from the market for this period and continuing to sell to their customers. It is currently a competitive market, so one could expect VC not to have to pay a large premium for doing so. You can see in the revised spread sheet a 20% loss factor in the Gross margin of year one. This is to cover the expected increase in costs from purchasing Polypropylene from the market to supply their customers for the 45 days shut down period.
Summary of Results
The project should be rejected by the board after the changes suggested above are reflected in the financials. The Capex project now has a negative NPV (-$2.50) and should therefore be rejected as it will not add to shareholder value. The IRR has dropped to 8.6%, below the required 10% Merseyside has for engineering projects. Therefore the project will not