Diamond Chemicals Caseanalysis
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Analysis
Introduction
This project belongs in the engineering-efficiency category; therefore, it has to fit at least 3 of 4 performance hurdles, which are 1. Impact on EPS; 2.Payback; 3.Discounted cash flow and 4. Internal rate of return.
In this article, some of those involved explained and described their opinions; however, professional knowledge may have been lacking. Therefore, we will expound and clarify below.
Management Analysis
Capital Expenditure
On the surface, making sure a project measures up to a range of consistent, prescribed criteria in order to be accepted would appear to be a sound business practice. But in our opinion, we think DC only focused on the financial management. We think they should utilize the strategy map strategy. A strategy map provides a uniform and consistent way to describe that strategy, so that objectives and measures can be established and managed. The strategy map provides the missing link between strategy formulation and strategy execution. (Norton and Kaplan, 2004 *1) Furthermore, DC wont only focus on the financial report; they also manage by human resource and other strategic elements. Also, any of the above financial calculations or assumption could bring the wrong settlement or the expectations will be seriously biased.
Economic / Financial Analysis
Transportation Costs
The transportation division asked that the cost of tank cars required for additional throughput should be involved in the initial outlay of the Merseysides project was ignored by Frank Greystock. Therefore, he was not involved in the analysis of the Merseyside project.
Regardless of how departmental budgets are established, best practices in capital budgeting clearly state that all side-effects of a project must be included in cash-flow projections (Schiff, 1988 *2). In fact, transportation costs have a significant impact on cash-flows and also on the value of the project.
If adding the budget for transportation cost is ignored, and even if the Merseyside project can add total throughput, the transportation division still cannot transfer the spared throughput due to the throughput is over the ability of the original transferring utility. Therefore, there will be a charge of ₤2millions which will be added to the project.
Impact- Cannibalization& Ramp up period
The issues of two impacts are in two ways. The first one, more efficient plants are likely to cannibalize sales from the Rotterdam plant. The second one, the forecasted rate of return for customers needs to account for a ramp up period before it is possible to reach the 7% additional revenue of the project. Furthermore, the two impacts should be calculated in the projects cash flows for the final evaluation purposes.
Ethical Issue
Tewitts suggestion of including the EPC product in the Merseyside renovations presents as an ethical issue, although we think developing EPC is an excellent idea for DC due to the companys competitive strength. But the description from Tewitt shows that he is placing his own self-interest above all other stakeholders and “above moral duties that override self-interest” (Van De Ven & Jeurissen, 2005).
Inflation and Capital Budgeting
In our opinion, the concerns of Andrew Gowan- Treasury analyst- regarding interest rate calculations used in Merseyside project evaluations are valuable. Due to Greystocks calculation mix nominal and real rates, he ignores the Fisher Effect. The definition of Fisher effect is the Fisher effect is in a model where inflation is expected to be steady, the nominal interest rate changes