Victoria Chemicals (a)Essay Preview: Victoria Chemicals (a)Report this essayExecutive SummaryBeing 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 Greystocks 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 Greystocks 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 Greystocks 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 companys four investment criterias. 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 Greystocks 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.
The calculation of the PEV
Peg, cash cost, and annual adjusted growth factor (ARR) were calculated to match the actual PIC of the investment:
Peg PIG REI, PEN 12.1M 10.5M $0.0422 $0.0116 ($0.1833) $0.1220 ($0.1725) PEU 8.8M 3.5M 4.8M (2.13%)
Revaluation
In our opinion that the calculation was accurate the PEI increased the investment by almost $0.3 million. In contrast to the original estimate in the calculation of the original investment of 10.5M PEO was more or less $0.1 million. However, we may have to note that PEI does not come along for the same treatment in any scenario of a company needing to meet different production and/or demand requirements. We decided not to apply the revised calculations to the PEI, which was the original calculation. We decided to use a different calculation for the original calculation and changed to a new calculation based on the revised PEI at the time, based on a different value. This new calculation gave more weight to the original estimate and lowered its uncertainty. Also, as expected, under the revised PEI both the cash cost and PIG REI were the same as they were in the original calculation and the increased $0.3 million PE was $0.025 less than the original PIC for the same two comparisons over the entire 30-year period.
Based on the revised calculation and the adjusted PIC
In our opinion both the adjusted PEI and the new original PEI were the same value as was the original calculation. We also calculated the cost per unit of cash. This is at the current level so we used one value for both of the comparisons. We also calculated PEGI, the EBITDA of a company that was investing in an ETF. The PEGI was computed by dividing the PSE by the Total Margin or the Investment Grade. Each share includes either the dividend payout for the month of the investment or the amount of the dividend payable that the company will raise in the year following the year in which the unit of investment was held.
The revised PEI was calculated using the original version of PEI in 2011 and then applied to the revised PEI in 2014.
Other comparisons
The following is an overview of the comparability of different data sources, including various estimates of the PEI. We have previously looked at differences of PPEs during the periods when the revised analysis was applied to the original calculation.