Richard B :: Business and Management Studies:

Richard B The cost of the plant renovation is paid in full on December 31, 1991. 1) Changes to analysis: a. The lost output due to construction should reflect the higher output of the renovated plant (24,075). Thereby the net output for the year corresponds to 10 months of the new output. b. The DDB depreciation should switch to straight-line when straight line is greater. Otherwise the plant does not get fully depreciated. c. The 3.5% overhead on capital for new projects should not be applied for the renovation of existing equipment. The overhead of the existing plant is not affected. Since there is no incremental change in overhead, it should not be included in the analysis. d. The preliminary engineering cost should not be included in the analysis for making a decision to renovate the plant. These are sunk costs and therefore are not included in an incremental analysis. e. A cumulative DCF was added so the payback period is clearly illustrated. The Hawkins' analysis appeared to add the "Free Cash Flow" without discounting to obtain the payback period. The revised payback period is 5.21 years. f. The equivalent annuity was added. The annuity equivalent to the revised NPV of 6.08 million pounds is 0.80 million pounds. This figure can be divided by the number of shares FYE 91 to obtain the average earnings per share of 0.0086 pounds. The Hawkins' analysis appeared to average the "Free Cash Flow" without discounting then divided by the number of shares to obtain the EPS. g. Hawkins should perform sensitivity analyses to the market price of polypropylene, the cost of the renovation, and the efficiency advantage of the renovated plant. (These are shown in Exhibits 2b through 2e). The margins are revised for the new prices keeping the cost of production fixed. Transport Division The cost of the additional capital required by the transport division should not be included in the analysis. Empirical Chemicals is actually helping the transport division by using its excess capacity. Additional capital obtained by the transport division should be paid by all of its customers through transportation fees. Director of Sales ================= There are a number of producers of polypropylene that have higher costs than EC Rotterdam. These producers will be the first to feel