Just Do It

Decision Making Analysis:
There were many different options that Victoria Chemicals could have exercised when doing this capital budgeting project (Merseyside Project). Even though there was more than one feasible solution to this project, there was only one that we believed would maximize shareholders’ wealth and ultimately make Victoria Chemicals more profitable. Once we considered all the possible solutions that Victoria’s Chemicals could exercise, we decided to modify some of Merseyside Project’s inputs, continue to go along with the project, while also implementing the joint axillary project Tewitt had introduced.
Key Reasons for Choice:
The original Meseyside project consisted of many careless mistakes. Some of the major flaws in the project were adding R&D into the evaluating analysis and not being consistent with their sources for inputs.   With the outcome we selected, these key flaws as well as other minor errors were corrected and value had been gain.
The original project used 10% for the discount rate, 0% for the inflation rate, and added $500,000 from R&D cost. This resulted in a NPV of 10.5 million and an IRR of 24%. The 7% and 0% used for the discount rate and inflation rate were both generic rates taken out of the company’s manual, rather than being adjusted for practical use. With our approach we used the treasures adjusted rates which allows for practical use changed these inputs from 10% to 7%, and 0% to 3%. These two rates are critical inputs in this project’s analysis. Using the 7% rather than the 10% fixed an error in determining discounted cash flows, while also lowering the project’s WACC.   The company also didn’t factor inflation into the project’s analysis which would have been an enormous error considering that the market does not remain constant.
The $500,000 factored into the analysis was omitted from this analysis due to it being a sunk cost.   The NPV almost doubled ending at 19.47 million and the IRR went up to 27.9%!...