Friday, March 8, 2019
American Chemical Corporation Essay
Statement of the problem In October of 1979, the American Chemical Corporation (ACC) began expression for a buyer for the Collinsville, Alabama plant after successfully getting 91% of the shares of Universal Paper Corporation. Dixon Corporation, a specialist chemic come with with customers primarily in the paper and pulp industry agreed to the possibleness of purchasing the Collinsville plant for $12 million. This purchase forget diversify Dixons product line, adding the sodium chlorate chemical, produced at the Collinsville plant, needed by its existing customers. Dixon is evaluating opposite streams of hard cash flows for the possibility of purchasing the Collinsville plant.Discussion The decision to acquire Collinsvilles plant will translate into strategic and economic benefits. Dixon could increase their total of chemical products to their existing clients. However, initiatory we looked in to the risk of the possible venture. Dixon has neer produced sodium chlorate wh ich could add risk to the new venture. For this reason we calculated the of import of the project based on the of import of the sodium chlorate industry. We focused on Brunswick and Southern Chemical which are pure play sodium chlorate companies.The intermediate unleveraged beta obtained from the two companies is 1.035 which reflects the risk of the project. Adjusting Dixons beta by re-levering it exploitation its own target capital structure of 35% ends with a beta of 1.59. The beta obtained is used to derive the CAPM method, leading in a 21.45% cost of equity. We assume that the debt borrowed by Dixon has a rate of 11.25% calculating an after-tax cost of debts of 5.85%. Therefore, the weighted mediocre cost of capital (WACC) for Collinsvilles plant cash flow is most 16%. This ratio will be used to evaluate the diametric NPVs of the projects.To make an dowerment decision three scenarios have been analyzed. The first and second scenarios are to finance the plant in 5 age or 10 years respectively both with a nonentity salvage order at the end of the term. The Third option is to purchase the plant with a laminated technology, ACCs technical support, and zero salvage value at the end of the term. The first two alternatives resulted in negative NPVs of ($1,928) and ($1,932) respectively, through with(predicate) an incremental cash flow analysis. However, acquiring Collinsville with the laminated technology will result in a positive NPV of $4,960, as well as,reducing the electric car power by 30%, and the possibility of adapting this technology to other plants to sign operating costs.Recommendation Based on our analysis, we recommend that Dixon Corporation invest in Collinsville with the laminate technology. Any of the other options, based on our incremental cash flow analysis, resulted in negative NPVs. We recommend investing in nil other than the laminate technology project for the benefit of the shareholders. However, Dixon should make an acquis ition correspondence protecting itself in case the laminate technology fails in providing expected results. It should be stated that ACC should compensate Dixon for any installation charges. The acquisition of the plant will increase wealth to the shareholders, as well as, complement the supplying of chemical products to our existing clients.