Finance and Terminal Value Essay

708 Words Mar 21st, 2012 3 Pages
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 other project, 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 sell it 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 needed for 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
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Because there isn’t enough information about the demographics of the area, seems like the right-of-way of the pipeline is such a specialized product and that it would be very hard to value.

4. Is it possible to quantify the value of potentially adding the Japanese technology to the Merseyside project? Discuss what the economic impact is from this investment flexibility.

It is possible to quantify the value of being able to add in the technology at a later date. Though it might be hard to give an exact number, but since the Merseyside project has a much faster payback period and more free cash flow early on, this is a value added to the Merseyside project. The impact of this flexibility is that it makes this project much more attractive than the Rotterdam where you cannot turn back once it has been started.

5. Which project should James Fawn propose the CEO and the Board?

Since the Rotterdam project does not meet one of the investment criteria, it should not be considered. This is not the only reason though; the Rotterdam project is much too dependent on the terminal value of the right-a-away. As it is mentioned in the report the company is a chemicals company, it what they do. To have such a large part of the project into something they do not do doesn’t make very much sense. Another reason is that Merseyside provides a lot more flexibility and is a lot less risky. It is less risky in the sense that the potential efficiency gains from

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