Rotterdam

1. Why are the Merseyside and Rotterdam projects mutually exclusive?

They are mutually exclusive because it would not make sense to invest in both projects. It has to be one or the otherproject, because an increase in out of 14% it not necessary in current market conditions. They are facing intense competition and in a recession. If the increase output to 14% they will not be able to sellit all without dropping prices and hurting already bad margins. Another reason is that an investment into the Rotterdam project seems like it is irreversible due to the extensive modifications neededfor the plant and the pipeline. So if the plans do not work out they cannot back out of it and try the Merseyside project.

2. How do the two projects compare on the basis of Victoria Chemicals’investment criteria? What might account for the differences in rankings?

Investment Criteria - Unmodified
Required Merseyside Rotterdam
EPS Impact Postive GBP .022 GBP .049
Payback 10% 24.30%18%

Assuming the unmodified basic projections in the project proposals we can see that the Rotterdam project has a clear lead in almost every aspect except payback period. The payback period onthe Rotterdam project does not meet the criteria. Difference might be that the Rotterdam requires significant invest spread over a period of time. The pipeline is a significant investment and upgradefor the plant. The NPV and IRR seem to relay heavily on the terminal value of the pipeline. The Japanese technology might be more efficient in the long run than the upgrades. The Merseyside project ismuch simpler and costs aren’t spread over 3 years.


3. Is Elizabeth Eustace’s treatment of the right-of-way correct in her spreadsheet analysis?

I don’t think it is at all correct to assumethe terminal value will be $40 million in 15 years. Projecting 15 years out is a very long time to make such an assumption even with a consultant forecast. A lot can happen in 15 years, there could...