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TUGAS KELOMPOK 6

FINANCIAL MANAGEMENT
Case: Victoria Chemicals, Plc

Dosen :
Prof. Dr. Sukmawati Sukamulja
Disusun Oleh :
Anindito Widya Wicaksono
Erwin
Herdwika Andyaswara
Novyandri Kristiyana
Rina Ariesta Kusumawati
Sri Hidayati
Kelas Eksekutif B Angkatan 29 D
Program Magister Manajemen
Fakultas Ekonomika dan Bisnis
Universitas Gadjah Mada
2015

Summary Victoria Chemicals plc (A):

The Merseyside Project


Character:
- POV Lucy Morris, plant manager of Victoria Chemicals Merseyside Works in
Liverpool, England
- Lucy Morriss superior: Frank Greystock
- EVP & manager of the Intermediate Chemicals Group (ICG): James Fawn
- Corporate Raider who had Victorias common share: Sir David Benjamin
Background
Victoria Chemicals, a major competitor in the worldwide chemicals industry,
was a leading producer of polypropylene, a polymer used in an extremely
wide variety of products and known for its strength and malleability.
Polypropylene was essentially priced as commodity. Supplier to customers in
Europe & Middle East
Production Process Stage:
1. Polymerization Propylene gas (a refined gas received in tank ears,
yang bought from 4 refineries in England) was combined with a diluents
(solvent) in a large pressure vessel. Ina catalytic reaction, the
polypropylene precipitated to the bottom of the tank and was then
concentrated in a centrifuge.
2. Compounding the basic polypropylene with stabilizers, modifiers, fillers
and pigments to achieve the desired attributes
Merseyside Works production process was old, semi continuous higher in
labor content than its competitors newer plants.
Victoria Chemicals produced polypropylene at Merseyside Works and in
Rotterdam, Holland; which are identical of scale, age and design.
Exhibit 1 presents a comparison of plant sized and indexed costs.
Capital Project proposal
Victoria Chemicals was under pressure from investors to improve its financial
performance. Earnings had fallen to 180 pence/share at the end of 2007
from 250 pence/share at the end of 2006. Morris proposed modernization
program for Merseyside Works.
GBP12million expenditure (to renovate & rationalize polypropylene
production line di Merseyside. The entire polymerization line would need to
be shut down for 45 days. Though customer would buy from competitors,
Greystock believed the loss of customers would not be permanent.
It would save energy and improve the process flow
1. Relocating and modernizing tank-car unloading areas, which would
enable the process flow to be streamlined
2. Refurbishing the polymerization tank to achieve higher pressures and
thus greater throughput

3. Renovating the compounding plant to increase extrusion throughput and


obtain energy savings
Benefits:
1. lower energy requirement (% of sales)
a. Year 1 5 = 1,25%
b. Year 6 10 = 0,75%
2. 7% greater manufacturing throughput
3. Improve gross margin (before depreciation & energy savings) from 11.5%
to 12.5%
Merseyside Works currently produced 250,000 metrics tons of polypropylene
pellets/year. Price = GBP 675 per ton. Tax rate = 30%. Depreciation of new
assets on an accelerated basis (double decline) 15 years, the expected life of
the asset. WIP/cost of goods = 3%. Preliminary engineering costs of
GBP500.000 in first year. Overhead costs = 3.5% x book value of assets
acquired in the project per year.
Hurdle rate = 10% (r=discount rate).
Exhibit 2 presents a preliminary DCF summary of Greystock assumption.

Concerns of the Transport Division


Transport Division, a cost center, oversaw the movement of all raw,
intermediate, and finished materials throughout the company and was
responsible for managing the tank cars
Due to projects increased throughput, the Transport division would have to
increase its allocation of tank cars to Merseyside Works.
The purchase of new rolling stock was estimated to be GBP 2 million in 2010.
Depreciable life of 10 years (DDB for 8 years and straight line depr for the
last 2 years)
The concerns of the Transport Division was not included in
preliminary DCF analysis (Exhibit 2)
Concerns of the ICG Sales & Marketing Department
Director of sales Industry is downturn and it looks like an oversupply so we
have to shift capacity away from Rotterdam toward Merseyside in order to
move the added volume (cannibalize in process?)
Vice President of marketing less skeptical whereas lower costs at
Merseyside would benefit due to taking business from competitors. Even if
cannibalize does exist, he believed that it would not be permanent and the
business will revive thus it would be reasonable to assume that any lost
business volume would return.
The charge for loss of business at Rotterdam was not included in
preliminary DCF analysis (Exhibit 2)

Concerns of the Assistant Plant Manager

Assistant Plant Manager Proposal to modernize a separate and


independent part of the Merseyside Works, the production line for ethylenepropylene-copolymer rubber (EPC). Victoria has been the largest supplier of
EPC and produced the entire volume at Merseyside Works. EPC has been
marginally profitable to Victoria Chemicals because of the entry by
competitors and the development of competing synthetic rubber compounds
over the past 5 years.
Proposal renovation of the EPC production line at a cost of GBP1million,
whereas it would give the lowest EPC cost base and would improve cash
flows by GBP 25,000 ad infinitium. At current prices and volume, NPV of this
project was GBP750.000 (opportunity to do this project concurrently with
Morris proposal?)
The concerns of the Assistant Plant Manager was not included in
preliminary DCF analysis (Exhibit 2)
Concerns of the Treasury Staf
Long term inflation expectation of 3% per year, thus Victoria Chemicals real
target rate of return is 7%
The concerns of the Treasury Staf was not included in preliminary
DCF analysis (Exhibit 2)
Evaluating Capital Expenditure Proposals at Victoria Chemicals
As engineering-efficiency category project, Merseyside should meet these
performance checklist:
1. Impact on earnings per share has to be positive. At FYE 2007, Victoria
Chemicals had 92,891,240 shares outstanding
2. Payback the maximum payback period was six years
3. DCF had to be positive and at hurdle rate of 10%
4. IRR IRR of engineering efficiency projects had to be greater than 10%
Conclusion
Based on Greystock analysis, Merseyside project met all four investment criteria:
1. Average Annual addition to EPS = GBP0.022
2. Payback period = 3.8 years
3. NPV = GBP 10.6million
4. IRR = 24.3%

Based on the concern of several departments that is narrated on the case, we


added several assumptions to Greystock DCF as follows:

1. Assumption based on concern of the Transport Division


We regard this project from the Company point of view whereas if we want to
implement the project we have to include the operational cost including the
transportation cost also the possibility of spending capital expenditure of it.
Consequently, we included cost of new rolling stock that was estimated to be
GBP 2 million in 2010, and then we depreciated the new rolling stock for 10
years.
2. Assumption based on concern of the Transport Division
It is likely that due to difficult situation in the industry, the demand of
Polypropylene would be stagnant. Then, to address the issue the company
would do cost efficiency strategy by shifting the production process from
Rotterdam to Merseyside, that could be defined as cannibalization by ICG
Sales & Marketing Department.
Therefore, it is reasonable to include the concern of the transport division
which is the loss of Rotterdam factory into DCF analysis.
3. Assumption based on concern of the Treasury Staf
Since it is reasonable to have inflation rate of 3% per annum than 0% per
annum, we included the Treasury Staf concern about inflation. Therefore the
real rate of return will be 7% per year because Greystock rate of return (10%)
has not yet reflected the inflation rate.
4. We chose to ignore the concerns of Assistant Plant Manager due to its
unappealing result of NPV. For this reason, we did not include the EPC project
into the calculation.
5. As we want to be more conservative, we modified the depreciation method
from DDB method to straight line method as well because we were concerned
that DDB depreciation method would alter the result due to its impact on
cash flow from the diferences of tax cost.
The result of our calculation can be seen on the appendixes and we summarized the
calculation results based on four investment criteria as follows:
AVG annual add to
EPS
Payback

GBP
0,012
5,7 Years

NPV
IRR

GBP 0,73
11,1%

Positive
Less then 6
Years
Positive
More than
10%

Due to its ability to meet the four investment criteria required, we suggest Victoria
Chemicals to implement capital project for plant at Merseyside Works at the cost of
GBP 12 Million and GBP 2 million for tank cars. The benefits of the project would be
a lower energy requirements as well as 7% greater manufacturing throughput per
year. The project was also expected to improve gross margin from 13,75% for 10

years and there after continued with 12,5%. Merseyside plant can modernize the
machine to increase the throughput and lower energy cost.

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