Diamond Chemicals Case Study

NPV analysis uses future cash flows to estimate the value that a project could add to a firm’s shareholders. A company director or shareholders can be clearly provided the present value of a long-term project by this approach. By estimating a project’s NPV, we can see whether the project is profitable. Despite NPV analysis is only based on financial aspects and it ignore non-financial information such as brand loyalty, brand goodwill and other intangible assets, NPV analysis is still the most popular way evaluate a project by companies.

The relatively well posed project with promises of great future pay offs must be examined closely nevertheless to determine its true profitability. As such, the Super Project’s NPV must be calculated, however before we proceed we must acknowledge the relevant cash flows. The project incurred an expense of testing the market. This expense, however, must not be included in our cash flow analysis because it can be considered a sunk cost. This expense is required for ‘taking a temperature’ of the market and will not be recovered. Other sources of cash flow include:

2. Net Present Value – Secondly, Peter needs to investigate the Net Present Value (NPV) of each project scenario, i.e. job type, gross margin, and # new diamonds drills purchased. The NPV will measure the variance of the present value of cash outflow (drilling equipment investment) versus the future value of cash inflows (future profits), at the benchmark hurdle rate of 20%. A positive NPV associated with the investment means that the investment should be undertaken as it exceeds the minimum rate of return. A higher NPV determines which project scenario will have the highest return on cash flow, hence determining the most profitable investment in terms of present money value.

This mini-case provides a review of the methodology and rationale associated with the various capital budgeting evaluation methods such as payback period, discounted payback period, NPV, IRR, MIRR,

The discount rate used is 10%, and the cash flows used are nominal, rather than real cash flows.

If the project required additional investment in land and building, how would this affect your decision? Explain

The Merseyside project clearly provides a superior return to the Rotterdam project based on the profit, cash flow and payback criteria. In addition, the positive net

Overall, we have decided that the Merseyside project should be accepted based on the achievement of Diamond Chemicals decision criteria. The project produces a positive NPV of €6.07, holds an IRR greater than their cost of capital at 21.4%, has a payback period less than 6 years at 5.71 years, and adds to earnings per share by generating an extra £.0203 per share. This project satisfies all 4 decision criteria requirements, making Morris’s choice easy in deciding to continue funding the project. Lucy Morris and Diamond Chemicals should go forward with the Merseyside project.

In the case of Worldwide Paper Company we performed calculations to decide whether they should accept a new project or not. We calculated their net income and their cash flows for this project (See Table 1.6 and 1.5). We computed WPC’s weighted average cost of capital as 9.87%. We then used the cash flows to calculate the company’s NPV. We first calculated the NPV by using the 15% discount rate; by using that number we calculated a negative NPV of $2,162,760. We determined that the discount rate of 15% was out dated and insufficient. To calculate a more accurate NPV for the project, we decided to use the rate of 9.87% that we computed. Using this number we got the NPV of $577,069. With the NPV of $577,069 our conclusion is to accept this

Given our recommendation to accept the new investment opportunity, this project will impact the forecasted financial statements from 2010 onwards. Please refer to Exhibits 6 and 7 for the revised projections.

"Better a diamond with a flaw than a pebble without" (Confucius 1). It is a common belief in today’s day and age that it is better to be something of value that is flawed than to be something of no value that has no flaws. Diamonds are formed from pure carbon, which is one of the most abundant elements on planet Earth, and makes up about 18% of the human body. In fact, all life on earth is carbon based. Even from ancient times diamonds have been sought for their extraordinary hardness (they are the hardest substance known to man) and exceptional beauty. In the modern world, when given the choice most people would purchase a two carat natural diamond over a one that was man made of the same price, even though

The project would have an initial outlay of £9 million and will require the entire line to be shut down for 45 days. This project would lower energy requirements and have a 7% greater manufacturing throughput. Also, it is expected to improve its growth margin to 12.5%.

Proposed upgrade EPC plant. Investment required of £1m. Improve cash flow by £25k ad infinitum. However, NPV = -£750,000. Strategic advantages suggested by Tewitt resulting from the project, including increases in volume and prices when the recession ends, should be ignored. There is nothing to suggest that an increase in business would eventuate.

The EPC project, originated by assistant plant manager, should be a separate project in the Merseyside's capital budgeting. Although the EPC production is a part of output from Merseyside plant, this project we are talking about is to renovate and rationalize the polypropylene production line. There is no dependency between them. We understand this EPC project might be very important for the company. But it is needed to propose another separate capital budgeting for approval.

Diamond-like carbon (DLC), exhibits a number of properties similar to diamond. DLC is a family of amorphous carbon materials, existing in seven different forms that contain sp2 and sp3 hybridised carbon atoms. Sp2 refers to the graphite bonding structure, whilst sp3 refers to a diamond bonding structure. Graphite and diamond have very similar structures, but the bonding type differentiates them. By altering the ratio of sp2 to sp3 bonding and hydrogen content, different mechanical properties in DLC films are observed. Figure 6.26 shows a phase diagram illustrating different DLC coating structures and their bonding type. More sp2 bonding gives rise to films of lower hardness and abrasion resistance, but improved tribological properties. Films containing a higher proportion of sp3 bonding and less hydrogen have a tetrahedral structure similar tantamount to diamond, exhibiting high surface toughness but reduced ductility.56 The relative proportion of the two bonding types is highly dependent on the deposition method and processing parameters.57 Values of Young’s modulus have above 900GPa have been obtained.58 Nuclear magnetic resolution (NMR) and electron energy loss spectroscopy (EELS) are common techniques to characterise the hybridization of DLC films.59