Victoria Chemical is the reputed brand in the polypropylene industry, which is used in wide variety of products. For enhancing the production of polypropylene, the two projects were introduced to its executive vice president, James Fawn for their two polypropylene plants located in Mersey side and Rotterdam. The company’s board has the policy to accept one project among two projects that have been submitted; therefore James Fawn is left with the choice to obtain approval for only one project
Background of Firm
Victoria Chemical is the major player in the chemical industry producing polypropylene. Victoria chemicals have two plants which produce polypropylene, one plant is located in Mersey side and another plant is located at Rotterdam. Both projects were introduced to enhance the production capacity of each plant and to improve economic profit within the company but due to the mutually exclusive projects only one of the projects can be accepted. Victoria Chemicals is facing pressure from its stakeholders to improve its profitability. The company has four criterions for evaluation of the proposed projects and to determine its feasibility and viability. The criterions that are used by the Victoria Chemicals is NPV, IRR, Payback and EPS.
Statement of Situation
Both the polypropylene production plants have the capacity of accession of product to 7 % or 17,500 tons per year, but due to the mutually exclusive projects the combined output of 14% is unjustifiable. There are four procedures used to evaluate the best outcome of projects i.e.
- Net Present Value ( NPV)
- Internal Rate of Return (IRR)
- Payback Period
- Growth in Earning Per Share (EPS)
Among the two proposals that have been submitted by both projects, the proposal of Manager of Rotterdam Plant, Elizabeth Eustace was quite abrasive compared to the manager of Mersey side Morris. The project of Mersey side consists of updating the existing facilities and the polypropylene production process. The proposal of Eustace was based on the future of lands to acquire which is completely outside the scope of organization core operations. Second option that was placed by Eustace was that the company cannot be successful without acquiring new technology which would be operated by the analog which would be headed by the advance programming that will be looked after the team of professional software professor from Japan, the installation of new system will not be adequate without the proper supply of pro pylene gas which would be obtained five kilometers away which could be extended to Rotterdam plant and refinery situated at the other end. The proposed plan which Elizabeth Eustace provided was quite contrary and disturbing to the proposal placed by the Morris to upgrade the existing facilities and production process of polypropylene. Morris suggested that in order to acquire a new technology, it would be beneficial to “wait and see” over the years if the technology prove itself. Morris submitted his project report consisting of three pages over which the management found it suitable for decision making, whereas, Eustace prepared the proposal that consists of 90 pages by taking into account of all schematics, engineering remarks and projections. However, over the proposal was citizen by the management as the bulk amount of detail does not make any project attractive
Constraints on Solution
As the company is having two mutually exclusive projects among which only one has to be accepted. The proposal of first project is to enhance the existing facilities and its production process of polypropylene whereas, second project proposed is to purchase the pipeline and extend it to Mersey side Plant. The extension pipeline to Mersey side plant can boost the production of polypropylene, but only one of the projects can only be undertaken. The problem encountered is to accept which project to extend the pipeline?
The policy of the firm is to use four criterions for Capital Budgeting Process i.e. 1- NPV, 2- IRR, 3-Payback and 4- EPS. However, the problem arises after analyzing the project with these criteria which arise in different opinion from each other, this leads into the complication that which method should be undertaken for the evaluation of projects.
The company’s capital budget program passes through various layers of management for approval which is the positive indicator of good corporate governance as the firm capital budget is first submitted for the approval of board of directors and then after their approval the firm’s capital budget is then forwarded to the CEO of Victoria Chemicals for his review, in this way the firm maintains its controls over the approval of new projects.
The Company used the four criterions for the appraisal of the projects; this criterion gives the management enough idea for determining the feasibility of the projects. The company also considered introducing the new technology which enables them to compete in the market and boost the production of polypropylene, since after acquiring the technology the firm will be the first European producer to implement the new technology which helps them to become the market leader among the European producers
The board of directors of the firm is willing to face the strategic factor which might become advantageous or disadvantageous for the company. This type of attitude towards the challenges makes the company to progress more in the time of certainties as the top layer of organization are willing to face challenges in the time of certainties that help the organization to grow…….
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