CASE 1 - A CASE STUDY OF VICTORIA CHEMICALS Corporate Finance (FEG304) Table of Contents 1.0) Introduction This report contains two case studies in the discourse of Corporate Finance, more specifically capital investment strategy. The cases are applied on the fictional company Victoria Chemicals and are divided into (A): “The Merseyside Project and Victoria Chemicals” and (B): “The Merseyside and Rotterdam project”. The cases are picked from the book “Case Studies in Finance – managing for Corporate Value Creation” written by Robert. F. Bruner. 1.1) Background Victoria Chemicals is a fiction company that processes polypropylene. The company is in fact even a leading producer of the substance, …show more content…
Another way that inflation can arise is if people want to buy more goods and services than the companies can produce. Yet another is if the costs of producing the goods and services increase. This may be because wages have risen, for instance. The companies may then need to raise their prices as compensation for rising production costs. But inflation can also arise if companies and households believe that everything will become more expensive. 2 Cannibalization Cannibalization is the negative effect of a company’s new launched product on the sales performance of its existing related product. It refers to that the new product replaces the demand of another product. The sales of the already existing product will get lower instead of expanding the company´s market base. (Berk & DeMarzo, 2014) Internal Rate of Return – IRR The internal rate of return (IRR) is a rate of return used in capital budgeting to measure and compare the profitability of investments. Generally speaking, the higher a project 's internal rate of return is, the more desirable it’s to undertake the project. As such, IRR can be used to rank several prospective projects a firm is considering. The project with the highest IRR would probably be considered the best and undertaken first. IRR is sometimes referred to as economic rate of return (ERR) or simply the rate of return (ROR). In theory should companies undertake all projects or investments available with IRRs that exceed the cost of capital.
By computing the highest discount rate at which a project will have a positive NPV, the IRR method is supposed to assure that the actual rate of return on an accepted project is higher than the required rate of return.
What are the causes of inflation? Inflation has a variety of possible causes, but they are between the Keynesian and monetarist theories, ranging between demand-pull, cost-push, built-in inflation, and the quantity model. With demand-pull, inflation is caused by aggregate demand being more than supply. With cost-push, inflation is caused when manufacturers and businesses raise prices due to shortages in order to balance increases in production costs. With built-in inflation, inflation occurs due to prior increases in prices
Inflation occurs when the general price level of goods and services have increased in a period of time. It is a measurement that signals the current economic situations and whether there is a potential economic growth.
This report will be covering the several capitals investment aspects in which are associated with the case – Victoria Chemicals PLC (A): The Merseyside Project, written by Robert. F. Bruner.
A new product introduced by company always impacts its existing products of same or similar category. Cannibalization in economics is defined as “The negative impact of a company 's new product on the sales performance of its existing related products. Market cannibalization refers to a situation where a new product "eats" up the sales and demand of an existing product.” (Investopedia). The energy bars are one of the best selling products of HPC. The introduction of the new Energy Gel product will cannibalize the sales of energy bar and may reduce the company’s overall profitability. Though in future, the energy gel will provide HPC with product differentiation approach, but in short term it will impact the sales of the best selling energy bars. Mr. Leiter the product manager of the energy bars projects that energy gel will reduce the energy bar sales by roughly 10% per year. That argument does not holds true as first year the energy gel will only be producing 4.2 Million units and against project 43.3 Million units of energy bar. The segment and demography of the energy gel and energy bar are slightly different, not everyone who buys energy gel will buy it in lieu of energy bar which is best selling product at present and it may take few years before market will get use and acquainted by the advantageous energy gel product. Since, no big companies are in energy gel market, its more probable that HPC’s energy gel product may put a dent on the other small companies selling
Product cannibalization is when a new product takes sales away from the same company’s existing product.
The transport division will have to increase allocation to Merseyside. The proposal will generate excess capacity for the division and will increase the demand of new tank cars. The costs generated for these cars would cost GBP2 million and have a depreciable life of 10
TEVA Pharmaceutical is a global pharmaceutical company that develops, produces and markets generic drugs. Its subsidiary, formally known as Sicor, is based in Irvine California and is responsible for the production of injectable suspensions and injectable complex drug delivery systems. TEVA USA’s Irvine office markets products from diverse therapeutic areas including analgesic, anti-infective, cardiovascular, oncology, CNS, dermatological and anti-inflammatory.
The use of an accounting rate of return also underscores a project 's true future profitability because returns are calculated from accounting statements that list items at book or historical values and are, thus, backward-looking. According to the ARR, cash flows are positive due to the way the return has been tabulated with regard to returns on funds employed. The Payback Period technique also reflects that the project is positive and that initial expenses will be retrieved in approximately 7 years. However, the Payback method treats all cash flows as if they are received in the same period, i.e. cash flows in period 2 are treated the same as cash flows received in period 8. Clearly, it ignores the time value of money and is not the best method employed. Conversely, the IRR and NPV methods reflect that The Super Project is unattractive. IRR calculated is less then the 10% cost of capital (tax tabulated was 48%). NPV calculations were also negative. We accept the NPV method as the optimal capital budgeting technique and use its outcome to provide the overall evidence for our final decision on The Super Project. In this case IRR provided the same rejection result; therefore, it too proved its usefulness. Despite that, IRR is not the most favorable method because it can provide false results in the case where multiple negative
Victoria Chemicals is a major competitor in the worldwide chemical industry. They are a leading producer of polypropylene, which is a polymer used in products such as medical products and automobile components. Victoria Chemicals started up in 1967 when they built two plants, one in Merseyside, England and one in Rotterdam, Holland. Both plants were identical to each other and produced an equal amount of goods. In 2008 these two plants have an old-fashioned production process of polypropylene and the production costs are some of the highest in the industry. The plants need to be renovated and rationalized. Victoria Chemicals was also under pressure from investors to improve their
The discount rate is a means of calculating a value now of benefits that occur in the future. The discount rate recognizes the time value of money. A four percent real discount rate is used in the calculations. However, the high-speed train project would be economically feasible even under the higher discount rates used by some public agencies and economists. The Internal Rate of Return (IRR) is an evaluation measure that is
Internal rate of return (IRR) and Payback period “IRR of a project provides useful information regarding the sensitivity of the project’s NPV to errors in the estimate of its cost of capital” (Pierson et al.2011, pp.157).This proposal also shows the project is profitable by using Excel to get the IRR of 18.9%, which is
• Will Need a New Tank Car to anticipated growth of the firm in other
Internal rate of return (IRR) is the discount rate that makes NPV equal to zero. It is also called the time-adjusted rate of return.
The following paper analyzes a project from financial perspectives using the capital budgeting techniques like Net Present Value (NPV) and Internal Rate of Return (IRR).