Victoria Chemicals Case Study

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preferences on each projects.ProblemWhich of the criteria should be viewed as the most important and useful in choosing theproject?

3. Data Analysis

The Merseyside project showed an NPV of £10.45m

compared to Rotterdam’s

£15.48m. The IRRs were 24% and 18% for Merseyside and Rotterdam, respectively.Merseyside would take 3.78 years to pay back the initial investment, and Rotterdamwould take 7.95 years. Growth in earnings per share was £0.022 for Merseyside and£0.048 for Rotterdam. The differences in rankings were due to a substantial

difference in the respective projects’ initial outlays and expected cash flows. The

Merseyside project had a higher IRR and a much lower payback period. Rotterdamhad a higher NPV by almost half a million pounds, and a larger growth in EPS.

4. Solutions

There is a conflict existing between these two mutually exclusive projects.Therefore, we will choose the best project based on the best criterion, which is NPV because NPV assumes reinvestment at the cost of capital and that is generally the bestassumption. Hence, the Rotterdam project should be chosen.

We believe the discount rate should be adjusted. We used the 7% discount ratewhich was deemed more accurate. We also accounted for a 3% inflation premium.

6. Implementation of Alternatives

The expected Net Present value of the Rotterdam project using the reviseddiscount rate and premium is GBP 27.79million. NPV gives explicit consideration tothe time value of money and is a good method to evaluate the project because itassesses all the cost involved. When the NPV of the project is greater than zero, thenthe firm can believe that this is an acceptable project. This new NPV shows that the

 project is a great investment. If they were to account for full erosion of Rotterdam’s

 business volume, there would still be a positive NPV for Merseyside and above thehurdle rate.The new IRR is 10.5% and this holds the project at an 3.5% higher rate thanminimally expected for a project. This IRR represents the project in a positive light.

7. Conclusion

James Fawn did have an extremely difficult decision to make. Although theMerseyside project passed all four criteria for further consideration, it was NPV  

which ultimately prevailed as the superior criterion. Therefore, Fawn should select theEustace