Unfinished Victoria Chemicals Plc a Analysis

2 February 2017

1. Victoria Chemicals evaluate its capital-expenditure proposals in four ways. They are average annual addition to earnings per share, payback period, net present value, and internal rate of return. An earnings per share method is to indicate a company’s profitability. For Victoria Chemical, this was calculated with the average annual earnings per share contribution of the engineering-efficiency project over its entire economic life.

However, for the basis of the calculation, the project’s initiator used the most recent fiscal year-end’s outstanding shares.If possible, using the company’s average weighted number of outstanding shares because this will change over the project’s lifetime. A payback period method is a simple way to decide if this project is reverting from loss to gain within a given period. For Victoria Chemicals engineering-efficiency project, the maximum payback period was six years and the calculation turns out to be 3. 8 years. According to this result, the company would accept the project but this method does not consider the possible cash flows after six years. Even though the project is assuming the payback will be in 3.

Unfinished Victoria Chemicals Plc a Analysis Essay Example

years, but it’s unclear how much needs to be invested before the 3. 8 years. Next is the net present value which focuses on all cash flows and incorporates discounted cash flows based on time and risk. This is the best method to determine whether to accept the engineering-efficiency project or not because if the result is positive, it will increase shareholders’ wealth. Although the net present value is the best method but it’ll be better if combined with the result of internal rate of returns calculation. The rate shows when the net present value of the project will reach zero.It is an important companion statistic in addition to net present value.

The requirement of the engineering-efficient project requires internal rate of returns to be greater than 10% and the result was 24. 3%. In conclusion, this project can be accepted with net present value and internal rate of return. 2. The Transport Division suggested that the cost of the tank cars should be included in the initial outlay of Merseyside Works’ capital program although Merseyside Works disagreed because they believe the tank cars are an excess capacity of the company.In my opinion, the tank cars are an opportunity cost. Currently this allocation is out of excess capacity but using it for the Merseyside Works would mean the return on the best alternative foregone for these tank cars.

The transport division could have various opportunities such as lend it or even sell it for cash. Nonetheless, the depreciation of the tank cars are changed due to the massive usage and it will make an impact on the cash flows for the transport division. In conclusion, it would be more reasonable to include this excess cost to the preliminary cash flow analysis.

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