How do the two projects compare on the basis of Diamond Chemicals’ investment criteria? What might account for the differences in rankings?

Diamond Chemicals uses several investment criteria to evaluate its capital investment decisions, including net present value (NPV), internal rate of return (IRR), payback period, and profitability index. The Merseyside and Rotterdam projects differ significantly in their financial and non-financial dimensions, which affect their rankings on these investment criteria.

On a financial basis, the Merseyside project has a lower initial investment cost of $12 million compared to $18 million for the Rotterdam project. However, the Rotterdam project has a higher expected net present value (NPV) of $21.3 million compared to $6.3 million for the Merseyside project. The Rotterdam project also has a higher internal rate of return (IRR) of 34.1% compared to 28.7% for the Merseyside project. The payback period for the Merseyside project is shorter, at 3.9 years compared to 4.5 years for the Rotterdam project.

Several factors may account for the differences in the projects’ rankings. First, the Rotterdam project involves building a new plant, which has higher upfront costs but potentially higher returns due to its larger production capacity and lower operating costs. Second, the Rotterdam project is expected to benefit from lower transportation costs due to its proximity to European markets, which increases its profitability. Third, the Merseyside project has a lower risk profile due to its reliance on an existing plant and technology, which makes it more attractive to risk-averse investors.