American Chemical Corporation Case Solution
Now add depreciation which we have calculated and less change in net working capital also less with capital expenditure free cash flows are coming out through this process and afterwards discounted cash flows are obtaining and in the end NPV is calculated by sum up all discounted cash flows. For NPV results are mentioned and calculated in Appendix 1 and 2.
Qualitative Analysis: Corporate Strategy
For the Qualitative analysis of the project, NPV is calculated at 16% discounted rate. We will be considering a probability approach of the project considering that the lamination has been implemented and the technology fails or success of the project. By the acquisition of Collinsville get fit well for Dixon strategy. Dixon already done some projects with Collinsville in the past years. For this plant, Dixon has proposed pro forma financial statement to analyze the plant’s future profitability non-laminated graphite electrodes but it hasn’t mentioned the operating economies. Dixon assumed that sodium chlorate’s price would increase by over 8% per year, Power cost per year 12% by reducing selling expense selling force and depreciation charges would be increased. For sale agreement, American corporation has agreed to provide technical support to Collinsville plant. They keep informed Dixon development of Laminated electrodes and Dixon would have to pay costs associated with installation of the laminated electrodes but unused debt capacity, Dixon planned to purchase in 12$ million, Dixon book debt ratio about 35%.
We calculate the NPV by adding up all the free cash flows which has been calculated. The NPV of the plant without Laminate had been calculated at $ (1499) Million at a 100% success rate and seems to be good and the NPV of plant with Laminate is 3563, which does not seem feasible to be invested in and there are possibilities of Dixon incurring loss if it invests in the plant
Premium or Discount earned on Investment of $12 million
For further more after calculated NPV, premium and discounted earned on investment of $12 million can be computed by adding up all the net free cash flows to find out the total net assets and prices should be in thousand so 12 million multiply by thousand that prices come up in thousands and finally premium can be calculated by subtracting net assets with prices. (See Appendix 3)
Recommendations and Conclusion
Providing the NPV and other areas of consideration, the recommendation being provided to the Dixon Corporation has not negated the offer and neither has it acquired the Collinsville Plant. This is because of the reason that NPV method is showing a loss in the case of not using lamination, and further with the new lamination. The offer price to be considered here, is an alternative for the organization as the Net present value of the project can be changed if a direct methodology is followed and the offer price of $ 12 Million is reduced to consider in the negative amount $ (1,499) for the without lamination, and a further positive amount $ 3,563 for with lamination effect.
Though, these factors are just a privy as the Dixon Corporation will have other benefits attached with the taking of the plant. This is called the synchronization effect, as it will reduce the combined costs and will be beneficial for the consolidated entity.
So after analysis and consideration of the value of Dixon $12 million and Free Cash flows, discounted cash Flows and NPV. We recommend Dixon to turn down the offer.
Appendix-1: DCF Valuation without Laminate
|Free Cash Flows: Without Laminate|
|Sales – $000||$13,280||$16,800||$19,760||$21,356||$23,028|
|Variable – Power||$6,304||$7,735||$9,386||$10,526||$11,780|
|– Salt & Other||1,285||1,621||1,753||1,836||1,956|
|Fixed – Labor||$1,180||$1,297||$1,427||$1,580||$1,738|
|Total manufacturing costs||$10,824||$12,869||$14,919||$16,317||$17,973|
|Net Operating Profit After Tax||427||1138||1557||1608||1553|
|Less: Change in NWC||204||316||266||144||150|
|Less: Capital Expenditures||-537.5||-537.5||-537.5||-537.5||-537.5|
|Free Cash Flows||1154||1395||1914||2137||2135|
|Net Free Cash Flows||-12000||1154||1395||1914||2137||12735|
|Discounted Cash Flows||-12000||995||1036||1226||1180||6063|
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