Diamond Chemicals Case

Study
Masters in Finance | Applied Corporate Finance

Nova School of Business and Economics

8th February 2016
NOVA SCHOOL OF BUSINESS AND ECONOMICS |
APPLIED CORPORATE FINANCE | GROUP 5A

GROUP 5A
Francisco Santos, 2273
Joo Santa Brbara, 2274
Jos Barbosa, 2329
Lus Colao, 2548
Miguel Pinto, 2316

Agenda
Executive Summary
Industry Overview
The Merseyside Project
Projects Valuation Process
Projects Attractiveness
GO/ NO GO Analysis

Mutually exclusive?
Merseyside vs Rotterdam
NPV and EPS
IRR and Payback

Strategic Comparison
Recommendations
NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE |
GROUP 5A

Executive
summary

Diamond Chemicals is one of the largest privately owned chemical

companies in the US. In terms of production cost per ton of
polypropylene, the firm is not doing better than average, which is
understandable given the age of its two factories. Furthermore, Diamond
Chemicals is under pressure to increase its financial performance.
This case focuses on the study of the two projects that have the goal of
increasing the production efficiency of the company:
Merseyside project: reducing cost by renovating and rationalizing the
production line.
Rotterdam project: introducing a new technology.
The group provided a thorough analysis and a few suggestions were
made regarding how to deal with the found errors.
Finally, the group compared both projects, and after concluding that they
SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE |
3
are indeed NOVA
mutually
exclusive,
GROUP 5Adecided on the recommendation. The

Industry Overview

NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE |

GROUP 5A

Projects Valuation Process

EPC project (exclude)

Impact on NPV +0,00M
Action: tell the assistant plant manager that both projects are
separate and therefore should be analyzed independently.

Cannibalization (include)
Impact on NPV -3,20M
Action: Because of the project, sales may decrease in the Rotterdam
factory

NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE |

GROUP 5A

Projects Valuation Process

Engineering costs (exclude)

Impact on NPV +0,32M
Action: The engineering costs (500.000) should not be included since they
were already incurred no matter if the project is implemented or not

45 days shutdown (include)

This scenario was already included on the valuation, we believe that a strong company
would only have the impact of the loss on production. It is however arguable that could
be some indirect costs like losing some clients.
Action: Part of this issue is already included in the NPV with the lost output. However,
the group believes that there would be also a potential loss of some clients, which is not
being taken into account.
NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE |
GROUP 5A

Projects Valuation Process

Inflation (include)
Impact on NPV +2,89M
Action: Acknowledge that the Treasury Staff was right. Since the Cash flows did not
include inflation, then the discount rate had to be the real one. Or, as we suggest, keep
using the nominal discount rate and add the 3% inflation estimated by the Treasury
staff.

Rolling stock (include)

Impact on NPV -3,33M
Action: She should tell the Transport Division that they are correct. Since the purchase of
the rolling stock would not occur without the project, than it is a direct consequence of
the project and therefore should be taken into account.

NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE |

GROUP 5A

Projects Valuation Process

Initial NPV
9M
EPC Project
0M
Cannibalization
3.2M
Engineering Costs
0.32M
Inflation

NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE |

GROUP 5A

Agenda
Executive Summary
Industry Overview
The Merseyside Project
Projects Valuation Process
Projects Attractiveness
GO or NO GO Analysis

Mutually exclusive?
Merseyside vs Rotterdam
NPV and EPS
IRR and Payback

Strategic Comparison
Recommendations
NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE |
GROUP 5A

Projects
Attractiveness
NPV = +5.68M

IRR = 24%

Financial
View
EPS = +0.0611 per
Payback = 4.08
share
years

NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE |

GROUP 5A

10

Projects
Attractiveness
Increase productivity

No learning curve, short

term solution.

Strategic
Flexibility in termsView
of
45 day shutdown, which will

change in technology

possibly result in a loss on

both clients and production

NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE |

GROUP 5A

11

GO or NO GO Analysis
Because of:
Meeting all financial requirements
Increasing the companys productivity
Being flexible to change to a new technology

Morris should continue to promote the project for

funding
NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE |
GROUP 5A

12

Mutually
Exclusive?
Exclusivity in Demand?
Assuming that the market stays constant for 15 years
Setting the annual output equal to 250.000 tons in both factories
The NPV is still positive in both projects, therefore they are
not mutually exclusive in demand
However and since the group does not have enough information,
we believe that the projects may be mutually exclusive due to
budget constrains or strategic goals.
NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE |
GROUP 5A

13

Agenda
Executive Summary
Industry Overview
The Merseyside Project
Projects Valuation Process
Projects Attractiveness
GO or NO GO Analysis

Mutually exclusive?
Merseyside vs Rotterdam
NPV and EPS
IRR and Payback
Strategic Comparison

Recommendations

NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE |

GROUP 5A

14

NPV and EPS

Merseysi
de

Rotterdam

NPV =GBP
5,68 M

NPV = GBP
17,31 M

EPS = 0,0611

EPS =0,1863

Why: Projects of different nature, Different initial investments, Different

strategic goals, Different investment phases, Different Gross Margins

NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE |

GROUP 5A

15

IRR and Payback

Merseysi
de

Rotterdam

IRR =24,03%

IRR = 19,03%

Payback = 4,08
Years

Payback = 8,17
years

Different Cash Flow timings:

Implementation takes 45 days at Merseyside and 3 years in Rotterdam.
Rotterdam only reaches full capacity in 2004 while Merseyside is in
2002
Rotterdam
only fully explores the learning curve after 2009 (Achieves
NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE |
the greatest Gross Margin) GROUP 5A

16

Strategic
Comparison
Merseyside
Fits all the four performance hurdles
Quickly implemented
No learning curve, short term solution
The Gross Margin starts decreasing after
year 5, which reflects its short horizon

NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE |

GROUP 5A

17

Strategic
Comparison
Rotterdam
Greater NPV
Long term horizon
Explore the learning curve
Only meets three of the requirements
Relies on the analysis of external
consultants
NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE |
GROUP 5A

18

Recommendation

The
financials
(NPV)
suggest:

We want a
long term
investment

Flexibility
of the
other
factory

Rotterda
m
project
NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE |
GROUP 5A

19

Thank you for your attention.

Nova School of Business and Economics

8th February 2016
NOVA SCHOOL OF BUSINESS AND ECONOMICS |
APPLIED CORPORATE FINANCE | GROUP 5A

GROUP 5A
Francisco Santos, 2273
Joo Santa Brbara, 2274
Jos Barbosa, 2329
Lus Colao, 2548
Miguel Pinto, 2316