Collinsville case study
1. Which firms are the “identical twins” of the Collinsville investment? Using the β’s for those assets and the methodology learned in this course, determines the appropriate discount rate for the Collinsville investment.
We are interested in obtaining the asset beta for Collinsville investment. Here from the reading material, we find there were altogether 6 chemical companies that produce sodium chlorates. They are Hooker, Pennwalt, American, Kerr-McGee, Brunswick and Southern. However, since we are evaluating the addition of a sodium chlorate plant, the two firms (Brunswick and Southern) who specialize in producing sodium chlorate are likely the best “twins”. To determine the asset betas of each company, we…show more content… Why we choose to use 20% for the power cost decrease is because if we can save cost to the best extent and we still have to reject the acquisition, then we can say we must not do the acquisition. Then we get the NPV of the project is $11.3M < $12M. (See table 4 for more details.) Thus, the marginal impact of the laminate technology is about $2.6 M (compared to the result in question 2), but it still cannot change our decision to reject the project. The increment of net working capital at the last year is not considered in this model; however, since the value is pretty small, even considering it does not change our final decision.
4.
Under these terms, should Dixon purchase the Collinsville plant? Do you believe the profit projections given in the case? How would this effect your decision to purchase the plant?
Dixon should not purchase the Collinsville plant whatever the laminate technology is employed or not.
Some of the assumptions we use may not be quite credible. The most important factor is that the plant has no salvage value after 10 years. As shown in question 3, after using laminate technology, the NPV of the project is close to $12M. If the plant could continue to work for a few years or it is possible to sell the plant and equipment for some money at the tenth year, then it is quite probable that the NPV of the project will be larger than $12M, which implies Dixon should purchase the plant.
Secondly, the laminate technology is also critical to
