Students familiar with option-pricing theory: Those who can appreciate the challenges in estimating option values might benefit from a more detailed presentation of the real option aspect. Next I will like to address some of the concerns that the Transport Division, Director of Sales, Assistant Plant Manager, and the Treasury Staff had. If there were any speculation, it occurred when Diamond bought the option in the first place; now it is time to harvest a lucky profit. All four of those requirements were met by the Merseyside Project. Soren started in May, when most pool owners have already bought another product. I feel that Merseyside Project is flexible around the idea of the new technology but they feel that it is not the right time.
First I will like to talk about how Diamond Chemicals evaluate its capital expenditure proposals. Comparing these to the averaged company hurdle rate of 9. Again, the text does not highlight this issue, but sharp students will raise it. What should Morris be prepared to say to the Transport Division, Director of Sales, her assistant plant manager and the analyst from the Treasury Staff? Also Rotterdam is experimenting with a new technology, the costs of that and the effectiveness of the system might account for the differences in rankings. This case series considers the capital-investment decisions to be made by executives of a large chemicals firm in January 2008. Being that the company is stuck between these projects shows that they are mutually exclusive projects.
Both of their plants were built in 1967 with annual output of 250,000 metric tons polypropylene. There are a couple of different ratings a person could give the founder of Diamond Wipes International, Inc. The two projects are the Merseyside Project and the Rotterdam Projects. A strategy map provides a uniform and consistent way to describe that strategy, so that objectives and measures can be established and managed. The goal of the two cases is to expose students to a broad range of capital budgeting … Read more » These two cases to consider the investment decisions of managers of large chemical companies are made in January 2001. Management Analysis Capital Expenditure On the surface, making sure a project measures up to a range of consistent, prescribed criteria in order to be accepted would appear to be a sound business practice.
In fact, the case writer hinted at the possibility of another reorganization at the end of 1984 in the note to Exhibit 14. When Eve Yen embarked on her business she was not totally prepared. In addition, a close reading of the nature of the investment in the right-of-way suggests that the right-of-way should be purchased, regardless of whether the Rotterdam project is undertaken. Words: 6598 - Pages: 27. To do so is at the least surreptitious and practically amounts to lying about the nature of the project. Since the company knows that in less than 4 years they can receive the investment back from the Merseyside Project, it gives them the ability to be able to propose new plans or invest in another future project. Earnings per share had fallen to £30 at the end of 2000 from around £60 at the end of 1999.
Morris has assumed the responsibility of Merseyside Works, and has decided improvements need to be made. Therefore, he was not involved in the analysis of the Merseyside project. Varying the discount rate affects the attractiveness of the two projects differently. It might give them a head start in reducing costs but it is not a guarantee. The authors point out that finding out your child is gay or lesbian can be hard for parents to accept.
Some students will resist the notion that Rotterdam would ever be re-engineered to the German technology, as suggested by the statements in the B case. Now, is in a dilemma where it has to select the best option that will add value to the business. Senior executives have already rejected the project. Welcome To Diamond Chemical Diamond Chemical is a national manufacturer of laundry, warewash, housekeeping, sanitizing, and other institutional and industrial products. The treatment of conflicts of interest and other ethical dilemmas that may arise in investment decisions. The upgrade of the Merseyside plant will require a capital expenditure of £9. Diamond holds an in-the-money option to purchase for £3.
Additionally, there are other key factors that should play into developing a business plan for your new business. It is my hope to provide you with some more information and try to make this decision a little less strenuous. The cash-flow effect from the change in timing of new tank cars is reflected, as are the changes in inventory. Both factories are identical in size, age, and plant design. The purpose of this memorandum is to educate the community on the ethical issues that should be taken into consideration when buying a diamond or additional precious jewelry. The impact of real options This consideration is appropriate to explore with students who have been exposed to option-pricing theory and the concept of real options.
This will be the best way for the directors of the company to determine what path is the best to take. A consultant told her that to lay a comparable pipeline would cost approximately 6 million. Although the improved cash flow would be great, the executive committee is correct on rejecting the project. Students should be encouraged to discuss the need for internally consistent assumptions about inflation in both cash flows and discount rate. Hence, the discount rate used should be adjusted for inflation, which is 3%. The modification is straightforward: students should inflate cash flows at 3% and keep the current discount rate of 10%.