Do you endorse Eustace’s analysis of the project at Rotterdam? How would you improve on it?

Eustace’s analysis of the Rotterdam project is flawed as she includes the right-of-way in the analysis. The right-of-way is an option that should be exercised regardless of whether the project at the Rotterdam plant is undertaken. Therefore, the cash flows associated with the right-of-way should be separated from the rest of the Rotterdam project cash flows. The DCF analysis should be recast without the cash flows. The result is that the NPV of the Rotterdam project just slightly exceeds the NPV of the Merseyside project (adjusted to correct for the changes suggested in the A case). However, Eustace’s analysis does not take into account the differences in the two projects’ risk profiles, which is an important consideration in investment decision-making.

Another potential issue is that Eustace uses a discount rate of 10% for both projects, which may not be appropriate for the Rotterdam project due to its higher risk profile. A more appropriate discount rate should be used to reflect the risks of the project.