TUGAS KELOMPOK 6FINANCIAL MANAGEMENTCase: Victoria Chemicals, Plc

Dosen :Prof. Dr. Sukmawati Sukamulja

Disusun Oleh :Anindito Widya WicaksonoErwinHerdwika AndyaswaraNovyandri KristiyanaRina Ariesta KusumawatiSri Hidayati

Kelas Eksekutif B Angkatan 29 DProgram Magister ManajemenFakultas Ekonomika dan BisnisUniversitas Gadjah Mada2015Summary 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 flow1. Relocating and modernizing tank-car unloading areas, which would enable the process flow to be streamlined2. Refurbishing the polymerization tank to achieve higher pressures and thus greater throughput3. 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 throughput3. 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 ethylene-propylene-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 Staff Long term inflation expectation of 3% per year, thus Victoria Chemicals real target rate of return is 7% The concerns of the Treasury Staff 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 outstanding2. Payback the maximum payback period was six years3. DCF had to be positive and at hurdle rate of 10%4. IRR IRR of engineering efficiency projects had to be greater than 10%

ConclusionBased on Greystock analysis, Merseyside project met all four investment criteria:1. Average Annual addition to EPS = GBP0.0222. Payback period = 3.8 years3. NPV = GBP 10.6million4. 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 DivisionWe 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 DivisionIt 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 StaffSince it is reasonable to have inflation rate of 3% per annum than 0% per annum, we included the Treasury Staff 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 differences 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 EPSGBP 0,012Positive

Payback5,7 YearsLess then 6 Years

NPVGBP 0,73Positive

IRR11,1%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.