Report: Net Present Value and Cash Flow Analysis Essay examples

Submitted By julioolague89
Words: 1551
Pages: 7
Open Document
JULIO OLAGUE

DIAMOND CHEMICALS PLC (A):
The Merseyside Project

March 4th, 2015

Disclaimer: Due to the current worldwide economic slowdown, an oversupply of polypropylene in the industry, and thus a very competitive market, the valuation of the Merseyside project provided in the report may fluctuate in the case of alterations in selling prices, costs of production, or actual sales figures.

Company Description
Diamond Chemicals is major competitor in the worldwide chemicals industry. It produces an extremely wide variety of polypropylene products and it has one facility in Merseyside and one in Rotterdam, Holland.

Key Points (Changes after the project) Recommendation
NPV:
£9 to £9.25 million.
IRR:
25.9% to 22.4%.
Payback period:
3.6 to 4.28 years.
EPS:
£0.018 to £0.023

Based on our discounted cash flow analysis and scenario analysis that we prepared, Diamond Chemicals should accept the renovation of the polypropylene line. The project meets all the four investment criteria (if assumptions used are correct).

OVERVIEW OF THE MERSEYSIDE PROJECT
Diamond Chemicals should undertake the renovation of the compounding plant, refurbish the polymerization tank to achieve greater throughput, and relocate and modernize tank-car unloading areas, as the Merseyside project is very attractive. If undertaken, the project will have a net present value (NPV) of £9.25 million, an internal rate of return (IRR) of 22.4%, a payback period of 4.28 years, and an average annual addition to earnings per share (EPS) of £.023 (assuming all factors involved our valuation of the project are accurate) (figure a). Furthermore, the project will provide the polypropylene plant with energy savings of 1.25% of sales in years 1-5, and .75% in years 6-10. While evaluating the project we came across some discrepancies regarding the values used in the discounted-cash-flow summary produced by Frank Greystock. The previous evaluation of the project included a preliminary engineering cost of £500,000, which we did not include because we treated it as sunk cost. Although the purchase of new rolling stock costing £2 million was not included in the summary (Greystock disagreed that the cost of the tank cars should be included in the initial outlay), we reflected the charge for the use of rolling stock in our discounted cash flow (DCF) analysis because it is part of the project cost. Moreover, the discount rate of 10% used in Greystock’s analysis is not correct as the values in the analysis should be adjusted for price rises, thus, we used an inflation rate of 3% to compensate for this. The recommendation made by Griffin Tewitt, the assistant plant manager, of including the EPC project as part of the polypropylene should not be taken into account. Since the EPC project has a negative NPV, Diamond Chemicals should not undertake this project as the company would only push the bad project along the main plan, which has a positive NPV.
SALES AND GROSS MARGIN SENSITIVITY ANALYSIS
Our discounted cash flow analysis assumes that we can sell all the added output (an additional 7%) that will be produced if Diamond Chemicals accepts the Merseyside project. But, since the company operates in an extremely competitive industry, future actual sales figures may differ from the forecasted values obtained in our DCF analysis. In order to sell the additional output the company might have to lower its selling prices. Hence, we have used different values at which a ton of polypropylene product could be sold in order to demonstrate that the project is still attractive given the different scenarios. If the company’s price per ton drops 2%, that is, from the estimated £541/ton to £530.18, the project would have a NPV of £6.94 million, an IRR of 19.6%, a payback period of 4.67 years, and an average annual EPS of £0.019 (figure b). If it drops to £513.95 (5% discount) it would have a NPV of £3.47 million, an IRR of 15.2%, a payback period of 5.42 years, and an average
Show More

Related Documents: Report: Net Present Value and Cash Flow Analysis Essay examples

Net Present Value and Art Gallery Essay

Executive Summary This report provides an assessment and evaluation of two capital projects according to estimates of their future profits and their future cash inflows. The two projects are: Art Gallery project at an estimated cost of £1,700,000 and Swimming Pool and Leisure centre project at an estimated cost of £2,000,000. The Methods used to assess both projects are the Account Rate of Return method, the Payback period method and the Net Present Value method. The calculations of these methods…

Words 3136 - Pages 13

CapBud 612 Analysis Group 3 Essay

glossary of concepts and terms 3. summary report of analysis 4. net present value analysis Abstract: The following document serves as a synopsis of the general capital budgeting process and how it is implemented within organizations is conveyed and defined. The key terms that coincide with the capital budgeting process are also defined. Risk analysis based on NPV (Net Present Value) is performed on the salvage values before and after sales tax values along with the various ranges in sales. Key…

Words 1001 - Pages 5

Cash Flow and Net Present Value Essay

have an estimated useful life of 5 years. The salvage value is $70,000. It is expected to increase net annual cash flows by $25,000. The borrowing rate is 8%. The cost of capital is 10%. Calculate the net present value of this project. (1) Explain the pros and cons of using this method to evaluate a capital expenditure (10 points) and (2) show all computations required to arrive at the correct solution. (15 points). (Points : 25) Net Present Value = -136000 + (25000/1.1) + (25000/(1.1^2)) + (25000/(1…

Words 1598 - Pages 7

Essay Debenahms Financial Accouting

the report will focus on the analysis of the statement of cash flow for Debenhams Plc. based on the company annual report for the year 2012. Appendix 1 is the statement of cash flow for the year ended 2012 which was taking from Debenhams Plc. annual report. The Major part that needs to be observed in the cash flow statement is the change in net cash and cash equivalent of the current year comparison to the previous financial year. As shown in the statement of cash flow in the annual report, the…

Words 940 - Pages 4

Essay about Final Report V8

Disney Research Report Xiaolan Liang Yifei Xue Frank Ng Paul Yap The Walt Disney Company Research Report Abstract This report aims to examine the investment viability of the Walt Disney Company and will assess its potential by first delineating the economic climate in which the company is operating in and interpolating our findings to ascertain its impact. We then scrutinize the feasibility of its prevailing corporate strategies in an atmosphere of shifting consumer demand and increasingly challenging…

Words 1721 - Pages 7

Essay on The Lazy Mower: Is It Really Worth It

Solution to Case 03 Cash Flow Analysis The Lazy Mower: Is it really worth it? Questions: 1. Prepare a Pro Forma Statement showing the annual cash flows resulting from the Lazy Mower project. (See table on next page) | |0 |1 | |Base | $ 46,162,736.36 |60.806% | |Pessimistic | $ 36,143,876.79 |51.733% | |Optimistic | $ 60…

Words 1047 - Pages 5

Essay about Capital Budgeting Case

shareholder value, prioritize 3. Implement and…

Words 1159 - Pages 5

Tesca Case Essay

The expected value of project is negative $1.67M, and therefore deemed risky from our perspective. Table 5: Expected Value Analysis Weak Average Strong NPV -$11,995,012.01 -$2,177,050.14 $6,047,687.74 x x x Probability 20% = 50% = 30% = EXPECTED VALUE -$2,399,002.40 -$1,088,525.07 $1,814,306.32 -$1,673,221.15 3) What is the project’s cost of equity? What is the appropriate discount…

Words 2315 - Pages 10

Preparing Financial Forecasts Report Essay

Part A Introduction This report refers to show the variances between the Flexed Budget and Actual results. After cooperation, we will understand the overview of the organization’s current situation. In order to find the problems and solve them, I analyzed them below. Here are the detailed information about the materials variance, labour variance and overhead variance. In addition, I will give out the advice of my opinion at the end of this report. |Tricol plc Flexible budget…

Words 1177 - Pages 5

How Firms use Capital Budgeting to Make Decisions Essay

Afterwards, management must choose between five types of capital budgeting methods: net present value, internal rate of return, payback period, discounted payback period, and profitability index. They will then determine which method will work best to help them make good decisions on choosing new investments for their company. Once they choose their method they can then use it to determine the future cash flows, the profitability, how it may or may not affect other projects the company chooses in…

Words 5130 - Pages 21