Diamond Chemical compounds PLC (A) and (B)
Teaching Take note
Synopsis and Objectives
These two cases present the capital expenditure decisions into consideration by executives of a large chemicals firm in January 2001. The A case (case 20) presents a go/no-go task evaluation with regards to improvements to a polypropylene creation plant. The B circumstance (case 21) reviews precisely the same project but from one level higher, in which the executive encounters an either/or investment decision among two mutually exclusive projects. The goal of the two instances is to uncover students to a wide range of capital budgeting concerns:
A case: go/no-go decision
1 ) The id of relevant cash flows; specifically, the treatment of: a. sunk costs
b. money flows received by cannibalizing another activity within the organization c. fermage of excessive transportation potential
d. company overhead aides
e. funds flows of unrelated tasks
2 . The critical evaluation of a capital-investment evaluation program. 3. Treating conflicts of interest and other moral dilemmas which may arise in investment decisions.
B circumstance: either/or decision
1 . The relevance of cash flows from assets that will be separable from the core task. 2 . The classic crossover problem, in which job rankings don't agree on the basis of net present value (NPV) and internal level of come back (IRR). several. The examination of real option benefit latent in managerial overall flexibility to change operating technologies. some. The identification of some classic online games or types of man behavior that may be counterproductive in the resource-allocation process.
Suggested Questions for Enhance Study
Two Excel schedule files support student research of these situations:
Diamond Chemical substances PLC. (A)Case_20. xls
Diamond Chemicals PLC. (B)Case_21. xls
Making those files available in advance to students is extremely recommended. (Instructor analysis may rely on TN_20. xls, which should not end up being shared with students. )
1 . What changes, in the event any, will need to Lucy Morris ask Outspoken Greystock for making in his cheaper cash flow (DCF) analysis? For what reason? What ought to Morris be prepared to say to the Transport Split, the Movie director of Revenue, her associate plant director, and the expert from the Treasury Staff? 2 . How eye-catching is the Merseyside project? With what criteria? three or more. Should Morris continue to showcase the job for money?
As described below, in the event the B case is trained on a stand-alone basis, the trainer should distribute the nota in Show TN1, which presents the DCF examination for the Merseyside task, corrected to get the issues reviewed in the A case.
1 . How come the Merseyside and Rotterdam projects contradictory? 2 . How can the two assignments compare on the basis of Diamond Chemicals' investment conditions? What may account for right after in ranks? 3. Is it possible to quantify the significance of managerial overall flexibility associated with the Merseyside project? Just how, if at all, performs this flexibility impact the economic attractiveness of the project? 4. Exactly what are the differences inside the ways Elizabeth Eustace and Lucy Morris have recommended their individual projects? Sow how does15404 those differences in style possess affected the results of the decision? 5. Which will project ought to James Fawn propose for the chief executive officer as well as the board of directors?
Both cases are made to be taught—one each—in continuous class lessons. The instructor may, however , educate the A case alone in a straightforward manner, and the M case by itself by distributing Greystock's revised discounted cashflow (DCF) analysis (included right here as Demonstrate TN1) together with the B circumstance.
Plan for the A case
1 . How does Precious stone Chemicals evaluate its capital-expenditure proposals? How come such an elaborate scheme? The goal of this opening is to focus students' pondering on the difficulties that the Merseyside project...