Merseyside Project Questions
1. The preliminary engineering cost of GBP500,000 that has already been spent on efficiency and design studies for the renovation is included on the projection for the project (in Assumptions it is included in Preliminary Engineering Costs). Should it be included? Why or why not? If not, change the projection to reflect this.
2. From page 70 of your textbook: "the corporate manual stipulated that overhead costs be reflected in the project analyses at the rate of 3.5% times the book value of assets acquired in the project per year." This cost is included in the Assumptions of the project under the title of "Overhead/Investment". Investopedia has a definition of overhead at this link: https://www.investopedia.com/terms/o/overhead.asp. The proposed project is largely a renovation project that only increases production by 7%. Should you include the 3.5% charge on the projection? Should you only include a portion of it or none at all? Explain your answer. If you think that it is inappropriate to charge the 3.5% on the project, adjust the assumption on the projection.
3. Pages 70 and 71 in your textbook describe concerns of the Transport Division that as a result of accepting the project the division would need to invest in new rolling stock earlier than anticipated. Greystock argues against it in the case. Do you agree with Greystock that the cost of the new rolling stock shouldn't be included or do you agree with the Transport Division that the cost of the new rolling stock cost of the rolling stock (GBP2 million) should be included in the initial outlay on the proposed Merseyside project? Is there a different alternative that should be investigated? (Hint: consider what the incremental cash flows are). Don't make any changes to the spreadsheet for this question.
4. On page 72, Greystock stated that "cannibalization really isn't a cash flow" and didn't include a possible decrease in sales from the Rotterdam plant in the estimated project cash flows for Merseyside. Do you agree with this statement and his decision not to include the possible decrease in sales at Rotterdam in the cash flows for the project? Why or why not? Don't make any changes to the spreadsheet for this question.
5. On page 72, Griffin Tewitt requests an adjustment to the Merseyside proposal. He would like the cash flows of the renovation (including the initial investment) to be added to the Merseyside proposal. Do you agree with his request? Why or why not? Don't make any changes to the spreadsheet for this question.
6. Page 73 provides concerns of the Treasury Staff that WACC (the discount rate) includes the expected rate of inflation at 3% per year. Do the numbers in the projection (revenues, expenses, and cash flows) include inflation? Should they? If you think that they should, adjust the inflation assumption in the assumptions area.
7. After changing the assumptions in the projection based on your answers above, what are the NPV, IRR, MIRR, Profitability Index, and Payback Period of the project? Based on criteria numbers 2 through 4, is this project acceptable? Would you accept this project?
8. Review each other's work for the individual assignment and agree on a projection for your "base case". The base case should reflect the policy decisions that you made for the individual assignments.
9. Using that projection, calculate the NPV, IRR, MIRR, Profitability Index, and Payback Period for each of the following scenarios:
a. No output gain (Output Gain/Original Output = 0%).
b. No improvement in the Gross Margin. (Gross Margin (ex. Deprec.) = 11.5%)
c. No energy savings.
d. Discount Rate (WACC) = 12%.
e. Discount Rate (WACC) = 8%
Create a table to display the outcomes of each of the scenarios. Something like the following:
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Base Case
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Scenario A
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Scenario B
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Scenario C
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Scenario D
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Scenario E
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NPV
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IRR
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MIRR
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Profitability Index
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Payback Period
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10. Based on your base case and the results of the scenarios, should Victoria Chemicals accept this project? Why or why not?
Attachment:- Assignment.rar