Question 1 Why does Greystock include the engineering costs of 500,000 in his analysis? Because its a cash expense which related to the project. This expense had been spent over the preceding nine months on efficiency and design studies for the renovation, so it is recorded in the first year in the free cash flow analysis in the exhibit 2. Question 2 Is Greystock right in not including a charge for the increased use of rolling stock in his analysis? Why? When the analysis is conducted from the Merseyside Plant perspective, he is right. As he said, the transport division is an independent department from Merseyside Project, and the transport division dont pay cash for what they are doing at Merseyside. However, if we analyse it from the whole companys perspective, the overall impact should be considered. If the throughput of the Merseyside Plant exceeds the capacity of the transport division and the transport division need to buy rolling stock by cash because of that, we need to take it into the consideration for the whole company. When the analysis is conducted from the Merseyside Plant perspective, he is right. However, we need to analyse it from the whole companys perspective, so the overall impact should be considered. If the throughput of the Merseyside Plant exceeds the capacity of the transport division and the transport division need to buy rolling stock by cash because of that, we need to take it into the consideration for the whole company. Question 3 Is Greystock right in stating that a cannibalization charge is rubbish? Why? In corporate finance, we care more about cash, because cash is king. As cannibalization charge is not a cash flow, we should not take that into consideration. Besides, as the marketing department leader said, the market will recover. Greystock is wrong because we need to take the incremental effect of the project for the whole company, so we need to subtract the cannibalization effect. For this project, it will bring positive effect to Merseyside Plant and Negative effect to Rotterdam Plant if there is
cannibalization. So we need to consider if the overall effect is positive.
Question 4 One of the performance hurdles employed by Diamond Chemicals to assess a potential project is its impact on EPS (earnings per share) growth. Is this a smart hurdle to use? Why? The EPS is a smart hurdle, but its not as smart as NPV and IRR, because it considered the projects impact to net income, not the impact to cash, but in corporate finance, we care more about cash as cash is king. So in my opinion, EPS can be used as a complementary hurdle to NPV and IRR, but it should not be one of the major hurdle we use.