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Table of Contents
Executive Summary................................................................................................................................. 1
Introduction ............................................................................................................................................ 3
About The Collinsville Plant .................................................................................................................... 3
Sodium Chlorate Market in USA ............................................................................................................. 3
Issues surrounding Collinsville opportunity ............................................................................................ 4
Valuation ................................................................................................................................................. 4
Using NPV Rule for the project Without Laminated Electrodes ...................................................... 5
Using NPV Rule for the project With Laminated Electrodes ............................................................ 5
Calculations of Beta ............................................................................................................................ 6
Debt/Equity ratio ................................................................................................................................ 6
Monte Carlo Analysis .......................................................................................................................... 6
For the Unlaminated factory............................................................................................................... 6
Recommendations .............................................................................................................................. 7
Exhibits .................................................................................................................................................... 8
Exhibit 1: Using NPV Rule for the project Without Laminated Electrodes (Full Table) ................... 8
Exhibit 2: Using NPV Rule for the project With Laminated Electrodes (Full Table) ......................... 9
Introduction
Dixon, an American specialty chemical producer, wants to buy Collinsville plant from
American Chemical Corporation, another typical chemical company in 1979. Dixon wants to
diversify its product line by acquiring the aforesaid plant, which produces sodiumchlorate to
supply to paper producers in South-eastern part of the US. This plant initially cost USD 12
million and additional USD 2.25 million needed to buy laminate technology to increase
efficiency and profitability of the plant in order.
Valuation
The Next important step is the valuation of sodium chlorate plant i.e. Collinsville Plant for
Dixon Company.
The given values and assumptions are summarised in the following tables:
Given
Assumptions
(Without Laminate)
Assumptions
Sales
Price of NaClO3
Power
Graphite Cost
Remains same
Increased by 8% per year
Increased by 12% per year
Increased by 5% per year
Labour Cost
Maintenance Costs
Other Costs
Remains same
Selling Charges
R&D Costs
Depreciation
Graphite Cost
Nil
(With Laminate)
Power Costs
Other Costs
Rm - Rf
8.5
Rd
11.25
Re
20.6945
WACC
15.498925
NPV
1469.926
500
1389.527
193.0962
2166.357
790.5317
1365.214
500
1453.446
209.9449
2108.715
666.2892
1216.009
500
1520.304
228.2873
2008.026
549.3763
1014.248
500
1590.238
248.2579
1856.229
439.7316
-89.2734
1123.096 2252.12 2892.344 3096.184 3197.48 3333.924 3458.43 3566.569 3653.766 3714.686
500
500
500
500
500
500
500
500
500
500
1060
1110
1160
1210
1270 1328.42 1389.527 1453.446 1520.304 1590.238
1285
1335
1385
1435
1495 1553.42 1614.527 1678.446 1745.304 1815.238
-204
316
266
144
150 177.618 193.0962 209.9449 228.2873 248.2579
2112.096 2771.12 3511.344 3887.184 4042.48 4209.726 4379.861 4535.069 4670.783 4781.666
1828.813 2077.622 2279.503 2185.031 1967.551 1774.139 1598.268 1432.943 1277.881 1132.753
NPV
12867.3
in the newer technology. Also the capital expenditures for first year are taken as 2.5 million
$(the cost of project). Now, the NaClO3 plant in Collinsville is valued using discounted cash
flow assuming the plant would operate using new replaced laminate electrodes when they
become available. In this project, it is founded out that the Net present value is positive
suggesting the project is profitable if $2.25mn of laminate electrodes is included in the
overall $12mn deal.
Calculations of Beta
The systematic risk of the project could be the risk of the production of sodium chlorate in
the industry. Therefore, we calculate beta of the project based on the beta of the sodium
chlorate industry.
The beta of Brunswick and Southern will be used to calculate the Beta un-leverd for the firm
because the two firms purely produce sodium chlorate. Their Beta will be first unlevered.
Then weighted average of those un-levered Betas will be used to calculate the levered beta
of the firm.
Debt/Equity ratio
For calculating levered Beta we take Dixons target capital structure (D/E ratio of 35%).
Financing by the debt package will temporarily increase Dixons D/E ratio to .47. But we take
.35 as the D/E ratio for calculation as the company will ensure that it maintains its target
D/E ratio in the long run.
Cumulative Probability
-4000
-3500
-3000
-2500
-2000
-1500
-1000
-500
NPV
Cumulative Probability
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
-20000
-10000
10000
20000
30000
40000
50000
60000
70000
NPV
Recommendations
Basing on our detailed calculations following recommendations are made to Dixon
Corporation
The net present value (NPV) of Collinsville plant (without the lamination technology)
comes out as -0.89 million. Since the NPV value is negative it is advisable not invest
in this project and company should pursue other alternatives.
If the new Lamination technology is installed in the Collinsville plant then the Net
present value comes out as $10.919 million. This is attributed mainly to the huge
savings in power and graphite costs. Even though it requires a $2.5 million extra
investment, the benefits far outweigh the costs. Because of a high NPV value it is
advisable to invest in the Collinsville plant and install the lamination technology. This
investment will not only create synergies because of the similarity in the business
but also add value to shareholders wealth.
If terminal values are taken as zero (assuming no residual value)then the NPV of
Collinsville plant comes out as -$2.928 million. And after installation of lamination
the NPV becomes as 3.6 million $. Because of the high NPV value in the later
scenario it is advisable to implement advanced Lamination technology while
investing in Collinsville plant.
Exhibits
Exhibit 1: Using NPV Rule for the project Without Laminated Electrodes (Full
Table)
Revenues
Sales(tons)
Avg price
Sales
Manufacturing costs
Power
Graphite
Salt and other
Total Variable Costs
Fixed Costs
Labor
Maintenance
Other
Total Fixed
Total Manufacturing Costs
Other Charges
Selling
R&D
Depriciation
Total
Total costs
1
1980
2
1981
3
1982
4
1983
5
1984
6
1985
7
1986
8
1987
32000
415
13280
35000
480
16800
38000
520
19760
38000
562
21356
38000
38000
38000
38000
38000
38000
606
654.48 706.8384 763.3855 824.4563 890.4128
23028 24870.24 26859.86 29008.65 31329.34 33835.69
6304
645
1285
8234
7735
791
1621
10147
9386
875
1753
12014
10526
940
1836
13302
1180
256
1154
2590
1297
277
1148
2722
1427
299
1179
2905
1580
322
1113
3015
10824
12869
14919
16317
17973
112
451
1060
1623
125
478
1110
1713
138
508
1160
1806
152
543
1210
1905
168
591
1270
2029
12447
14582
16725
18222
16550.05
1148.364
2359.423
20057.84
9
1988
18536.06
1205.782
2511.606
22253.45
10
1989
20760.39
1266.071
2673.605
24700.06
1738
1911.8 2102.98 2313.278 2544.606 2799.066
354 383.736 415.9698 450.9113 488.7878 529.846
1153
1154
1154
1154
1154
1154
3245 3449.536 3672.95 3918.189 4187.394 4482.912
19766.9 21759.92 23976.03 26440.84 29182.97
186.48
632.37
1328.42
2147.27
Operating profit
EBIT after tax
Capital Expenditure
Depriciation
Net working capital
FCFF
PV
833
2218
3035
3134
3026
433.16 1153.36
1578.2 1629.68 1573.52
500
500
500
500
500
1060
1110
1160
1210
1270
-204
316
266
144
150
1197.16 1447.36
1972.2 2195.68 2193.52
1036.592 1085.145 1280.318 1234.217 1067.627
NPV
-89.273
2956.072
1537.157
500
1328.42
177.618
2187.959
922.0893
2826.78
1469.926
500
1389.527
193.0962
2166.357
790.5317
2625.412
1365.214
500
1453.446
209.9449
2108.715
666.2892
2338.48
1216.009
500
1520.304
228.2873
2008.026
549.3763
1950.478
1014.248
500
1590.238
248.2579
1856.229
439.7316
Exhibit 2: Using NPV Rule for the project With Laminated Electrodes (Full Table)
1
1980
2
1981
3
1982
4
1983
5
1984
6
1985
7
1986
8
1987
9
1988
10
1989
Revenues
Sales(tons)
Avg price
Sales
Manufacturing costs
Power
New power
Graphite
Salt and other
Total Variable Costs
Fixed
Labor
Maintenance
Other
Total Fixed
32000
415
13280
35000
480
16800
38000
520
19760
38000
562
21356
6304
5043.2
354
1285
6682.2
7735
6188
0
1621
7809
9386
7508.8
0
1753
9261.8
10526
8420.8
0
1836
10256.8
1180
256
1154
2590
1297
277
1148
2722
1427
299
1179
2905
1580
322
1113
3015
1738
1911.8 2102.98 2313.278 2544.606 2799.066
354 383.736 415.9698 450.9113 488.7878 529.846
1153
1154
1154
1154
1154
1154
3245 3449.536 3672.95 3918.189 4187.394 4482.912
9272.2
10531
12166.8
13271.8
112
451
1285
1848
125
478
1335
1938
138
508
1385
2031
152
543
1435
2130
11120.2
12469
14197.8
15401.8
Other charges
Selling
R&D
New Depriciation
Total
Total costs
38000
38000
38000
38000
38000
38000
606
654.48 706.8384 763.3855 824.4563 890.4128
23028 24870.24 26859.86 29008.65 31329.34 33835.69
11780 13193.6 14776.83 16550.05
9424 10554.88 11821.47 13240.04
0
0
0
0
1956 2082.162 2216.461 2359.423
11380 12637.04 14037.93 15599.46
168
591
1495
2254
186.48
632.37
1553.42
2372.27
18536.06
14828.85
0
2511.606
17340.45
20760.39
16608.31
0
2673.605
19281.91
Operating profit
EBIT after tax
Capital Expenditure
Depriciation
New Depriciation
Net working capital
FCFF
PV
2159.8
4331
5562.2
5954.2
6149
1123.096 2252.12 2892.344 3096.184 3197.48
500
500
500
500
500
1060
1110
1160
1210
1270
1285
1335
1385
1435
1495
-204
316
266
144
150
2112.096 2771.12 3511.344 3887.184 4042.48
1828.813 2077.622 2279.503 2185.031 1967.551
NPV
12867.3
6411.392
3333.924
500
1328.42
1553.42
177.618
4209.726
1774.139
6650.826
3458.43
500
1389.527
1614.527
193.0962
4379.861
1598.268
6858.786
3566.569
500
1453.446
1678.446
209.9449
4535.069
1432.943
7026.473
3653.766
500
1520.304
1745.304
228.2873
4670.783
1277.881
7143.626
3714.686
500
1590.238
1815.238
248.2579
4781.666
1132.753