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Britannia Chemicals was under pressure from investors to improve its financial performance because of the accumulation of the firm’s common shares by a well-known corporate raider. Earnings had fallen to 180 pence per share at the end of 2017 from around 250 pence per share at the end of 2016. The manager of Merseyside Works, a production plant owned by Britannia Chemicals, thus believed the time was ripe to obtain funding from corporate headquarters for a modernization program for her plant—at least she had believed this until her controller presented her with several questions that had only recently surfaced. This A case presents a go/no-go project evaluation regarding improvements to a polypropylene production plant. It explores aspects related to identifying incremental cash flow implications of investment decisions and evaluating related financial criteria, including impact on earnings per share, payback, and net present value, and internal rate of return.
The objective of this A case is to expose students to a wide range of capital-budgeting issues. They will consider the following: 1) the identification of relevant cash flows and, in particular, the treatment of sunk costs, cash flows obtained by cannibalizing another activity within the firm, exploitation of excess transportation capacity, corporate overhead allocations, cash flows of unrelated projects, terminal value, and inflation; 2) the critical assessment of a capital-investment evaluation system; and 3) the treatment of conflicts of interest and other ethical dilemmas that might arise in investment decisions.