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Diamond Chemicals Team 6's DCF Analysis of Merseyside Project

This document contains a discounted cash flow analysis of a proposed project for Diamond Chemicals' Merseyside plant. It analyzes the project's incremental profits, depreciation, taxes, and cash flows over 15 years. It assumes the project will cost £12 million initially and produce 250,000 metric tons annually, increasing output by 7% per year. The analysis finds the net present value is £5.32 million, the internal rate of return is 21.5%, average earnings per share addition is 0.019, and payback period is 4.4 years. It also accounts for potential lost sales from reduced output at an existing Rotterdam plant.

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315 views1 page

Diamond Chemicals Team 6's DCF Analysis of Merseyside Project

This document contains a discounted cash flow analysis of a proposed project for Diamond Chemicals' Merseyside plant. It analyzes the project's incremental profits, depreciation, taxes, and cash flows over 15 years. It assumes the project will cost £12 million initially and produce 250,000 metric tons annually, increasing output by 7% per year. The analysis finds the net present value is £5.32 million, the internal rate of return is 21.5%, average earnings per share addition is 0.019, and payback period is 4.4 years. It also accounts for potential lost sales from reduced output at an existing Rotterdam plant.

Uploaded by

kwarden13
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as XLSX, PDF, TXT or read online on Scribd
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DIAMOND CHEMICALS

Team 6's DCF Analysis of Merseyside Project


(Financial values in millions of British Pounds)

Assumptions
Annual Output (metric tons) 250,000 Discount rate 10.0%
Output Gain/Original Output 7.0% Depreciable Life (years) 15
Price/ton (pounds sterling) 541 Overhead/Investment 3.5%
Inflation Rate (prices and costs) 3.0% Salvage Value 0
Gross Margin (ex. Deprec.) 12.50% WIP Inventory/Cost of Goods 3.0%
Old Gross Margin 11.5% Months Downtime, Construction 1.5
Tax Rate 30.0% After-tax Scrap Proceeds 0
Investment Outlay (mill.) 12.00 Preliminary Engineering Costs 0.5
Energy Savings/Sales Yr. 1-5 1.25%
Yr. 6-10 0.8%
Yr. 11-15 0.0%

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Year: Now 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Estimate of Incremental Gross Profit
New Output (tons) 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500 267,500
Lost Output--Construction (33,438)
New Sales (Millions) 126.63 149.06 153.53 158.14 162.88 167.77 172.80 177.98 183.32 188.82 194.49 200.32 206.33 212.52 218.90
New Gross Margin 13.8% 13.8% 13.8% 13.8% 13.8% 13.3% 13.3% 13.3% 13.3% 13.3% 12.5% 12.5% 12.5% 12.5% 12.5%
New Gross Profit 17.41 20.50 21.11 21.74 22.40 22.23 22.90 23.58 24.29 25.02 24.31 25.04 25.79 26.57 27.36
Old Output 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000
Old Sales 135.25 139.31 143.49 147.79 152.23 156.79 161.50 166.34 171.33 176.47 181.76 187.22 192.83 198.62 204.58
Old Gross Profit 15.55 16.02 16.50 17.00 17.51 18.03 18.57 19.13 19.70 20.29 20.90 21.53 22.18 22.84 23.53
Incremental Gross Profit 1.86 4.48 4.61 4.75 4.89 4.20 4.32 4.45 4.59 4.72 3.41 3.51 3.62 3.72 3.84

Estimate of Incremental Depreciation


New Depreciation 1.60 1.39 1.20 1.04 0.90 0.78 0.68 0.59 0.51 0.44 0.57 0.57 0.57 0.57 0.57
Transportation Depreciation 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20
Overhead 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42
Preliminary Engineering Costs 0.50
Pretax Incremental Profit (0.86) 2.47 2.79 3.09 3.37 2.80 3.03 3.25 3.46 3.66 2.21 2.32 2.42 2.53 2.64
Tax Expense - 0.74 0.84 0.93 1.01 0.84 0.91 0.97 1.04 1.10 0.66 0.69 0.73 0.76 0.79

After-tax Profit (0.86) 1.73 1.95 2.16 2.36 1.96 2.12 2.27 2.42 2.56 1.55 1.62 1.70 1.77 1.85
Cash Flow Adjustments 0.025 0.025 0.025 0.025 0.025 0.025 0.025 0.025 0.025 0.025 0.025 0.025 0.025 0.025 0.025
Less Capital Expenditures (12.00)
Add back Depreciation 1.80 1.59 1.40 1.24 1.10 0.98 0.88 0.79 0.71 0.64 0.77 0.77 0.77 0.77 0.77
Less Added WIP inventory 0.31 -0.58 -0.12 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
After-tax Scrap Proceeds 0.00
Free Cash Flow (12.00) 1.28 2.76 3.26 3.43 3.48 2.96 3.02 3.08 3.15 3.23 2.35 2.42 2.49 2.57 2.65

Adjustment for erosion in Rotterdam volume:


Lost Rotterdam Output - 17,500.00 17,500.00 17,500.00 17,500.00 17,500.00 17,500.00 17,500.00 17,500.00 17,500.00 17,500.00 17,500.00 17,500.00 17,500.00 17,500.00
Lost Rotterdam Revenue - 9.47 9.47 9.47 9.47 9.47 9.47 9.47 9.47 9.47 9.47 9.47 9.47 9.47 9.47
Lost Rotterdam Gross Profits - 1.09 1.09 1.09 1.09 1.09 1.09 1.09 1.09 1.09 1.09 1.09 1.09 1.09 1.09
Lost Gross Profits after Taxes - 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76
Change in Rotterdam Inventory - 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28
Total Effect on Free Cash Flow - (0.48) (0.48) (0.48) (0.48) (0.48) (0.48) (0.48) (0.48) (0.48) (0.48) (0.48) (0.48) (0.48) (0.48)
DCF, Erosion Rotterdam (3.20)

NPV = 5.32
IRR = 21.5%
AVG EPS Addition = 0.019
Payback = 4.4

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