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Diamond Chemical Lls Case Solution

In: Business and Management

Submitted By littleaki
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Based on the discussion with other divisions and teams, we believe that there are several adjustments to be made.
First, with regard to the Transport Division’s memorandum, we determined that the charge for the use of excess rolling stock is non-material and the higher utilization rate is actually good for overall efficiency. It is, however, proper to allocate the accelerated schedule to purchase new rolling stock attributable to this project to the capital budget. We do so in the amount of $2 million discounted to 2001 using 10%. This change makes the total cost 10.65 million.
The allocation of sales force and how to reach the sales target should be the responsibility of the sales and marketing department. Their concern regarding cannibalization of sales between the company’s two plants cannot be reliably modeled with the data available. However we should make adjustment on the loss of output due to construction, including both the 45 days shut down and a period for sales to grow back to their pre-construction base. Moreover, the loss should be based on pre-project output level, not new output. Thus, we increased the loss of output to 62,500 (250000 / 360 days * 45 days *2) tons, double the original figure.
The EPC project should not be considered because it is unrelated to the poly renovation plan. In particular, there are no synergies between the two proposed projects that have been identified.
The discount rate should not be changed to 7%, instead, we add the 3% to inflation rate as suggested by the Treasury Staff. The 10% is thus a nominal rate and the cash flows are nominal, so the discount rate should not be real. In addition, the preliminary engineering is a sunk cost, so the 0.5 million should not be included.

The company evaluates this proposal based on EPS, NPV, IRR, and payback period. After all the adjustments, the project NPV is $9 million with…...

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