How does Diamond Chemicals evaluate its capital-expenditure proposals? Why such a complicated scheme?

 

Diamond Chemicals evaluates its capital-expenditure proposals using a complicated scheme that takes into account a variety of investment criteria. This scheme involves several stages of analysis, including a screening stage, a financial analysis stage, a strategic fit analysis stage, and a final review by the capital-expenditure committee. The company’s investment criteria include net present value (NPV), internal rate of return (IRR), payback period, and accounting rate of return.

The reason for such a complicated scheme is that Diamond Chemicals is a large, decentralized organization with many different divisions and a wide range of potential investment opportunities. By using a detailed and thorough process for evaluating capital-expenditure proposals, the company can ensure that it is making sound investment decisions that align with its overall strategic objectives. This process also helps to ensure that all relevant factors are taken into account when making investment decisions, including financial factors, strategic fit, and potential risks.
What is the Transport Division’s suggestion? Does it have any merit?
The Transport Division has suggested that Diamond Chemicals should use excess capacity in its own transport fleet to ship polypropylene from Rotterdam to the Merseyside plant, rather than using a third-party carrier. The Transport Division argues that this would save the company money and also help to keep the transport fleet busy during a period of low demand.

The suggestion has some merit, as using excess capacity in the company’s transport fleet could help to reduce transportation costs and increase overall efficiency. However, it is important to consider the potential impact on other divisions of the company, particularly the Polypropylene Division. If the Transport Division charges the Polypropylene Division for the use of excess capacity, this could increase the overall cost of the Merseyside project and reduce its attractiveness. Therefore, the suggestion should be carefully evaluated in light of all relevant factors before a final decision is made.
What is the director of sales’ suggestion? Does it have any merit?
The Director of Sales has suggested that Diamond Chemicals should delay the Merseyside project in order to avoid cannibalizing sales of existing products. The Director of Sales is concerned that the new polypropylene production capacity will lead to a drop in prices for existing products, which could ultimately reduce overall profitability for the company.

This suggestion has merit in that cannibalization is a legitimate concern, particularly in industries where there is a significant overlap in product offerings. If the Merseyside project were to cannibalize existing products, the net benefit to Diamond Chemicals could be less than what is projected.

However, it is important to note that the impact of cannibalization is difficult to quantify and may not be significant enough to outweigh the potential benefits of the Merseyside project. This is particularly true if the new products introduced by the project are significantly different from existing products and attract a new customer base.

Morris should be prepared to acknowledge the concern of the director of sales and explain how the company plans to mitigate any potential cannibalization. She could also provide information about market research and customer surveys conducted during the project planning phase to assess the potential impact on existing products.
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