Intro

This spreadsheet supports STUDENT analysis of the case,

"Diamond Chemicals (A)" (UVA-F-1351).

Please note:

1) This is a working model. Assumptions / Inputs presented can be

changed to vary the results.

2) As long as default spreadsheet calculation is "automatic" the

impact of changing assumptions will be computed in real time. If
calculation is set as "manual" you should press the F9 function key
to
recalculate results. To set numerical calculation settings to
automatic look under tools, options, calculations menu.

Copyright © 2001 by the Trustees of the University of Virginia Darden School Foundation.
Revised: October 2005.

Page 1
 Intro

l Foundation.

Page 2
 Exhibit 2
DIAMOND CHEMICALS (A)
Frank Greystock's DCF Analysis of Merseyside Project
(Financial values in millions of British Pounds)

Assumptions
Annual Output (metric tons) 250,000 Discount rate 10.0%
Output Gain/Original Output 7.0% Depreciable Life (years) 15
Price/ton (pounds sterling) 541 Overhead/Investment 3.5%
Inflation Rate (prices and costs) 0.0% Salvage Value 0
Gross Margin (ex. Deprec.) 12.50% WIP Inventory/Cost of Goods 3.0%
Old Gross Margin 11.5% Months Downtime, Construction 1.5
Tax Rate 30.0% After-tax Scrap Proceeds 0
Investment Outlay (mill.) 9.00 Preliminary Engineering Costs 0.5
Energy Savings/Sales Yr. 1-5 1.25%
Yr. 6-10 0.8%
Yr. 11-15 0.0%

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Year Now 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
1. Estimate of Incremental Gross Profit
New Output (tons) 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500
Lost Output--Construction (30,825)
New Sales (Millions) 128.04 144.72 144.72 144.72 144.72 144.72 144.72 144.72 144.72 144.72 144.72 144.72 144.72 144.72 144.72
New Gross Margin 13.8% 13.8% 13.8% 13.8% 13.8% 13.3% 13.3% 13.3% 13.3% 13.3% 12.5% 12.5% 12.5% 12.5% 12.5%
New Gross Profit 17.61 19.90 19.90 19.90 19.90 19.18 19.18 19.18 19.18 19.18 18.09 18.09 18.09 18.09 18.09

Old Output 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000
Old Sales 135.25 135.25 135.25 135.25 135.25 135.25 135.25 135.25 135.25 135.25 135.25 135.25 135.25 135.25 135.25
Old Gross Profit 15.55 15.55 15.55 15.55 15.55 15.55 15.55 15.55 15.55 15.55 15.55 15.55 15.55 15.55 15.55
Incremental Gross Profit 2.05 4.34 4.34 4.34 4.34 3.62 3.62 3.62 3.62 3.62 2.54 2.54 2.54 2.54 2.54

2. Estimate of Incremental Depreciation

New Depreciation 1.20 1.04 0.90 0.78 0.68 0.59 0.51 0.44 0.38 0.33 0.43 0.43 0.43 0.43 0.43
3. Overhead 0.32 0.32 0.32 0.32 0.32 0.32 0.32 0.32 0.32 0.32 0.32 0.32 0.32 0.32 0.32
4. Prelim. Engineering Costs 0.50
5. Pretax Incremental Profit 0.04 2.99 3.13 3.25 3.35 2.72 2.80 2.87 2.92 2.98 1.79 1.79 1.79 1.79 1.79
6. Tax Expense 0.01 0.90 0.94 0.97 1.01 0.82 0.84 0.86 0.88 0.89 0.54 0.54 0.54 0.54 0.54

7. After-tax Profit 0.03 2.09 2.19 2.27 2.35 1.90 1.96 2.01 2.05 2.08 1.25 1.25 1.25 1.25 1.25
8. Cash Flow Adjustments
Less Capital Expenditures (9.00)
Add back Depreciation 1.20 1.04 0.90 0.78 0.68 0.59 0.51 0.44 0.38 0.33 0.43 0.43 0.43 0.43 0.43
Less Added WIP inventory 0.28 -0.43 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
After-tax Scrap Proceeds 0.00
8. Free Cash Flow (9.00) 1.50 2.70 3.09 3.06 3.02 2.49 2.47 2.45 2.43 2.41 1.68 1.68 1.68 1.68 1.68

NPV = 9.12
IRR = 26.3% 26%
q1 Based on the issues discussed in the case, how should Greystock modify his DCF analysis? State five significan

sol 1. initial 9 million GBP investment for upgrading and rationalizing the product line
2. 7% increase in manufacturing output
3. increase in gross margin of 12.5% from 11.5%
4. introduction of GBP 2 million for rolling stock of the trasnport divison
5. renovation of EPC production line GBP 1 million
6. the real rate of return should be taken instead of the standard discount rate 7%

given assumptions
Annual Output (metric tons) 250,000
Output Gain/Original Output 7.0%
Price/ton (pounds sterling) 541
Inflation Rate (prices and costs) 0.0%
Gross Margin (ex. Deprec.) 12.50%
Old Gross Margin 11.5%
Tax Rate 30.0%
Investment Outlay (mill.) 9.00
Discount rate 10.0%
Depreciable Life (years) 15
Overhead/Investment 3.5%
Salvage Value 0
WIP Inventory/Cost of Goods 3.0%
Months Downtime, Construction 1.5
After-tax Scrap Proceeds 0
Preliminary Engineering Costs 0.5

q2 What is s the Merseyside project worth to Diamond Chemicals? Present the updated analysis for both with and w

annual production = 250,000 units

daily sale = 250,000/365 684.9315068493
sale of 45 days = 685*45 30825
sale value of 45 days = 30825*541 16676325

so the cannibalisation amount would be 16,676,325

case 1 with cannibalisation

now 2001
new sales
New Output (tons) 267500
Lost Output--Cannibalisation 30825
New Sales (Millions) 144.7175
New Gross Margin 12.50%
cannibalisation amount ₹ 16.68
New net sale ₹ 128.04
New Gross Profit ₹ 16.01

Old Output 250000

Old Sales 135.25
Old Gross Profit 15.5538
increase in cash flows 0.0250
 Incremental Gross Profit ₹ 0.48

2. Estimate of Incremental Depreciation

New Depreciation 1.2
3. Overhead 0.315
4. Prelim. Engineering Costs 0.5
5. Pretax Incremental Profit ₹ 1.18
6. Tax Expense 0.0110734688

7. After-tax Profit ₹ 1.17

8. Cash Flow Adjustments
Less Capital Expenditures 9
Add back Depreciation 1.2
Less Added WIP inventory 0.2778220969
After-tax Scrap Proceeds 0
8. Free Cash Flow -9 2.6431455031

NPV = ₹ 16.52
IRR = 15%
dsic rate = 7%

case 2 without cannibalisation

now 2001
new sales
New Output (tons) 267500
Lost Output--Cannibalisation 0
New Sales (Millions) 144.7175
New Gross Margin 12.50%
cannibalisation amount ₹ -
New net sale ₹ 144.72
New Gross Profit ₹ 18.09

Old Output 250000

Old Sales 135.25
increase in cash flows 0.0250
Old Gross Profit 15.5538
Incremental Gross Profit ₹ 2.56

2. Estimate of Incremental Depreciation

New Depreciation 1.2
3. Overhead 0.315
4. Prelim. Engineering Costs 0.5
5. Pretax Incremental Profit ₹ 2.95
6. Tax Expense 0.0110734688

7. After-tax Profit ₹ 2.93

8. Cash Flow Adjustments
Less Capital Expenditures 9
Add back Depreciation 1.2
Less Added WIP inventory 0.2778220969
After-tax Scrap Proceeds 0
8. Free Cash Flow -9 4.4126861281
NPV = ₹ 15.60
IRR = 15%
dsic rate = 7%

we have added the incremetal cash flows from the upgraded EPC production line into our a
DCF analysis? State five significant changes that need to be incorporated in the analysis

suggested changes
Annual Output (metric tons) 250,000
Output Gain/Original Output 7.0%
Price/ton (pounds sterling) 541
Inflation Rate (prices and costs) 0.0%
Gross Margin (ex. Deprec.) 12.50%
Old Gross Margin 11.5%
Tax Rate 30.0%
Investment Outlay (mill.) 12.00
Discount rate 7.0%
Depreciable Life (years) 15
Overhead/Investment 3.5%
Salvage Value 0
WIP Inventory/Cost of Goods 3.0%
Months Downtime, Construction 1.5
After-tax Scrap Proceeds 0
Preliminary Engineering Costs 0.5

dated analysis for both with and without Cannibalization. Calculate both NPV and IRR for the project for each case.

685

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

267500 267500 267500 267500 267500 267500 267500 267500 267500 267500

144.7175 144.7175 144.7175 144.7175 144.7175 144.7175 144.7175 144.7175 144.7175 144.7175
12.50% 12.50% 12.50% 12.50% 12.50% 12.50% 12.50% 12.50% 12.50% 12.50%

144.72 144.72 144.72 144.72 144.72 144.72 144.72 144.72 144.72 144.72
18.09 18.09 18.09 18.09 18.09 18.09 18.09 18.09 18.09 18.09

250000 250000 250000 250000 250000 250000 250000 250000 250000 250000
135.25 135.25 135.25 135.25 135.25 135.25 135.25 135.25 135.25 135.25
15.5538 15.5538 15.5538 15.5538 15.5538 15.5538 15.5538 15.5538 15.5538 15.5538
0.0250 0.0250 0.0250 0.0250 0.0250 0.0250 0.0250 0.0250 0.0250 0.0250
₹ 2.56 ₹ 2.56 ₹ 2.56 ₹ 2.56 ₹ 2.56 ₹ 2.56 ₹ 2.56 ₹ 2.56 ₹ 2.56 ₹ 2.56

1.04 0.901333 0.781156 0.677001 0.586735 0.508503 0.440703 0.381943 0.331017 0.430322
0.315 0.315 0.315 0.315 0.315 0.315 0.315 0.315 0.315 0.315

₹ 3.60 ₹ 3.46 ₹ 3.34 ₹ 3.24 ₹ 3.15 ₹ 3.07 ₹ 3.00 ₹ 2.94 ₹ 2.89 ₹ 2.99
0.896972 0.938572 0.974625 1.005871 0.815875 0.839345 0.859685 0.877313 0.892591 0.537185

₹ 2.70 ₹ 2.52 ₹ 2.37 ₹ 2.23 ₹ 2.33 ₹ 2.23 ₹ 2.14 ₹ 2.07 ₹ 2.00 ₹ 2.45

12
1.04 0.901333 0.781156 0.677001 0.586735 0.508503 0.440703 0.381943 0.331017 0.430322
-0.4315 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0
3.312778 -8.57466 3.148936 2.909382 2.918844 2.738912 2.582971 2.447822 2.330693 2.884709

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

267500 267500 267500 267500 267500 267500 267500 267500 267500 267500

144.7175 144.7175 144.7175 144.7175 144.7175 144.7175 144.7175 144.7175 144.7175 144.7175
12.50% 12.50% 12.50% 12.50% 12.50% 12.50% 12.50% 12.50% 12.50% 12.50%

144.72 144.72 144.72 144.72 144.72 144.72 144.72 144.72 144.72 144.72
18.09 18.09 18.09 18.09 18.09 18.09 18.09 18.09 18.09 18.09

250000 250000 250000 250000 250000 250000 250000 250000 250000 250000
135.25 135.25 135.25 135.25 135.25 135.25 135.25 135.25 135.25 135.25
0.0250 0.0250 0.0250 0.0250 0.0250 0.0250 0.0250 0.0250 0.0250 0.0250
15.5538 15.5538 15.5538 15.5538 15.5538 15.5538 15.5538 15.5538 15.5538 15.5538
₹ 2.56 ₹ 2.56 ₹ 2.56 ₹ 2.56 ₹ 2.56 ₹ 2.56 ₹ 2.56 ₹ 2.56 ₹ 2.56 ₹ 2.56

1.04 0.901333 0.781156 0.677001 0.586735 0.508503 0.440703 0.381943 0.331017 0.430322
0.315 0.315 0.315 0.315 0.315 0.315 0.315 0.315 0.315 0.315

₹ 3.29 ₹ 3.15 ₹ 3.03 ₹ 2.92 ₹ 2.83 ₹ 2.75 ₹ 2.69 ₹ 2.63 ₹ 2.58 ₹ 2.68
0.896972 0.938572 0.974625 1.005871 0.815875 0.839345 0.859685 0.877313 0.892591 0.537185

₹ 2.39 ₹ 2.21 ₹ 2.05 ₹ 1.92 ₹ 2.02 ₹ 1.92 ₹ 1.83 ₹ 1.75 ₹ 1.68 ₹ 2.14

12
1.04 0.901333 0.781156 0.677001 0.586735 0.508503 0.440703 0.381943 0.331017 0.430322
-0.4315 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0
2.997778 ₹ -8.89 2.833936 2.594382 2.603844 2.423912 2.267971 2.132822 2.015693 2.569709
ed EPC production line into our analysis
 2012 2013 2014 2015

267500 267500 267500 267500

144.7175 144.7175 144.7175 144.7175

12.50% 12.50% 12.50% 12.50%

144.72 144.72 144.72 144.72

18.09 18.09 18.09 18.09

250000 250000 250000 250000

135.25 135.25 135.25 135.25
15.5538 15.5538 15.5538 15.5538
0.0250 0.0250 0.0250 0.0250
₹ 2.56 ₹ 2.56 ₹ 2.56 ₹ 2.56

0.430322 0.430322 0.430322 0.430322

0.315 0.315 0.315 0.315

₹ 2.99 ₹ 2.99 ₹ 2.99 ₹ 2.99

0.537185 0.537185 0.537185 0.537185

₹ 2.45 ₹ 2.45 ₹ 2.45 ₹ 2.45

0.430322 0.430322 0.430322 0.430322

0 0 0 0
0 0 0 0
2.884709 2.884709 2.884709 2.884709

2012 2013 2014 2015

267500 267500 267500 267500

144.7175 144.7175 144.7175 144.7175

12.50% 12.50% 12.50% 12.50%

144.72 144.72 144.72 144.72

18.09 18.09 18.09 18.09

250000 250000 250000 250000

135.25 135.25 135.25 135.25
0.0250 0.0250 0.0250 0.0250
15.5538 15.5538 15.5538 15.5538
₹ 2.56 ₹ 2.56 ₹ 2.56 ₹ 2.56

0.430322 0.430322 0.430322 0.430322

0.315 0.315 0.315 0.315

₹ 2.68 ₹ 2.68 ₹ 2.68 ₹ 2.68

0.537185 0.537185 0.537185 0.537185

₹ 2.14 ₹ 2.14 ₹ 2.14 ₹ 2.14

0.430322 0.430322 0.430322 0.430322

0 0 0 0
0 0 0 0
2.569709 2.569709 2.569709 2.569709