Diamond Chemicals: The Merseyside Project

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Project Evaluation Parameters

Initial Analysis

Updated Analysis

Company Threshold

Qualifies

Earnings Per Share

0.018 GBP

0.017 GBP

Has to be positive



Payback Period

3.6 Years

4.06 Years

Less than 6 Years



Net Present Value

9M GBP

12.75M GBP

Has to be positive



Internal Rate of Return

25.9%

22.2%

Greater than 10%



Conclusions and Recommendations:

Based on the updated analysis we have arrived at the following conclusions and recommendation:

- The capital program should be presented with real cash flows and real discount rate of 7%

- The preliminary engineering costs should be treated as sunk costs and excluded from analysis.

- It makes sense to include investment outlay for transportation trucks, as it doesn’t compromise the economic attractiveness of the project. The cost of the transportation trucks is a cost that the company will have to bear sooner or later. A larger benefit that will impact the whole company should not be avoided because of the conflict of ownership of an inevitable cost between two departments.

- The EPC project should not be included simply because its not economically attractive and including it will prevent the Merseyside from meeting qualification criteria.

The Merseyside project should be taken by Diamond Chemicals since it meets all the qualification criteria and will increase earnings per share by 0.017 GBP. Further, as suggested in the OECD Environmental Outlook for chemicals Industry 2001, OECD countries like UK have to innovate and leverage technology to bring down the production costs and meet the consumers demand. It is projects like the Merseyside project that will contribute towards the economic growth of Diamond Chemicals in the time when its expected to improve its financial performance.

Appendix:

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References:

- Diamond Chemicals PLC (A): The Merseyside Project

- OECD Environmental Outlook for the Chemicals Industry: 2001 (https://www.oecd.org/env/ehs/2375538.pdf)