American Chemical Corporation Analysis Essay

Executive SummaryAmerican chemic communitys Collinsville graft in Alabama is being sought by Dixon a speciality chemicals company. This plant mainly specialises in Sodium Chlorate payoff and fits well with Dixons strategy of supplying chemicals to cover and pulp industry. It would in any case complement Dixons existing crossroad line. The plant cost $12 billion in investment and requires up to$ 2.25 million for upgrading to new engineering science. An in-depth investigation and analysis is conducted for both(prenominal) the company and the industry to accurately determine the worth of investment in the Collinsville plant. Net present set argon aimd for all potential scenarios. After a thorough analysis of the data, sui tabulate recommendations are provided. footDixon, an American specialty chemical producer, wants to buy Collinsville plant from American Chemical muckle, another typical chemical companyin 1979. Dixon wants to diversify its product line by acquiring the af oresaid plant, which produces sodiumchlorate to supply to paper producers in S show uph-eastern part of the US. This plant initially cost USD 12 million and additive USD 2.25 million needed to buy laminate technology to ontogenesis efficiency and positiveness of the plant in order.About The Collinsville PlantAmerican Chemical Corpo proportionalityns plant in Collinsville had the capacity to produce 40000 tons of sodium chlorate per year. Sodium chlorate is produced via the electrolytic decomposition of salt, water and energy. The authorised factors for us to contain regarding sodium chlorate is where the demand for this chemical comes from. 85% of demand for the product is derived from the paper and pulp industry, where it is used in the production of the bleach that is used to make white the paper. The remaining 15% comes from its use as a soil sterilant, in uranium mining and in the production of other chemicals.Sodium Chlorate grocery in USABargaining Power of Customers * Customers include Paper & cornmeal mush Producing Companies like Georgia Pacific and Universal * Be arrive at of high-pitched competition among the sodium chlorate producers, the bargaining power is being increased. * The demand is also increasing at the rate of 8 to 10% per year with extra usage in the plant effluent problems of paper corporations. Competition within Industry * extremely Competitive Market * Market Leaders like Hooker, Pennwalt, American & Kerr-McGee aim more than 55% of the US Market * Huge number of delicate medium enterprises with active shares in the sodium chlorate market in US * Paper Companies like Universal also have their own NaClO3 plants actively participating in the competition. * Companies like Brunswick and Confederate are specialised solo in NaClO3 production Threat of New Entrants* Union Chemicals and Lousiana Paper company have already announced their entry into the competition with 40000 and 35000 tons plants severally Threat of Substitut es * Graphite Rods used in the production of NaClO3 are being replaced with Metal or Laminate rods. * This would eliminate graphite costs and also smother power costs by approx. 30% Issues surrounding Collinsville opportunity1. bear on on revenues Reduction in margins due to overcapacity Although sodium chlorate prices were evaluate to increase, the overcapacity would cause number of tons to reduce (competition) and therefore, hit the margins. 2. relate on costs Increase of electricity from $0.019 in 1977 per kWh to $0.025 per kWh in 1979. Besides, due to upward followup of assets, depreciation was expected to increase. 3. Impact from adoption of technology Depreciation would increase and Dixon was required to pay all costs related to the tackation of laminated electrodes. 4. Impact of Financing of acquisition Temporarily increase Debt to capital ratio to 47%. Target debt to capital ratio 35% ValuationThe Next important step is the valuation of sodium chlorate plant i.e. Colli nsville Plant for Dixon Company. The given set and assumptions are summarised in the following tablesUsing NPV radiation diagram for the frame Without Laminated ElectrodesDetails of the expected values is given in Exhibit 1As the table is clearly indicating the net present value is a negative value if the Collinsville Plant is valued assuming that the graphite rods are not substituted with the laminate ones. This chore may not be juicy considering this negative value. Using NPV Rule for the project With Laminated ElectrodesDetails of the expected values is given in Exhibit 2For astute the NPV of project in case of Laminated Electrodes, the power costs are decrease by 20%. The Graphite costs are taken as zero since there is no utilisation of graphite in the newer technology. too the capital expenditures for world-class year are taken as 2.5 million $(the cost of project). Now, the NaClO3 plant in Collinsville is valued using discounted cash come down assuming the plant wo uld operate using new replaced laminate electrodes when they become available. In this project, it is founded out that the Net present value is positive suggesting the project is profitable if $2.25mn of laminate electrodes is included in the overall $12mn deal.Calculations of BetaThe systematic risk of the project could be the risk of the production of sodium chlorate in the industry. Therefore, we calculate genus Beta of the project based on the beta of the sodium chlorate industry. The beta of Brunswick and Southern will be used to calculate the Beta un-leverd for the firm because the deuce firms purely produce sodium chlorate. Their Beta will be first unlevered. Then weighted average of those un-levered Betas will be used to calculate the levered beta of the firm.Debt/Equity ratioFor calculating levered Beta we take Dixons pit capital structure (D/E ratio of 35%). Financing by the debt package will temporarily increase Dixons D/E ratio to .47. But we take .35 as the D/E ratio f or calculation as the company will ensure that it maintains its target D/E ratio in the long run.four-card monte Carlo AnalysisMonte Carlo analysis is used to gauge the sensitivity of free cash flows on the Net present value of the project. This is used to simulate various sources of scruple inherent in the cash flows. Monte Carlo Analysis is performed on both the relevant scenarios in the case and the variations are plotted in a graph.For the Unlaminated factoryAfter installing laminationRecommendationsBasing on our detailed calculations following recommendations are made to Dixon Corporation * The net present value (NPV) of Collinsville plant (without the lamination technology) comes out as -0.89 million. Since the NPV value is negative it is advisable not invest in this project and company should pursue other alternatives. * If the new Lamination technology is installed in the Collinsville plant then the Net present value comes out as $10.919 million. This is attributed mainly t o the huge savings in power and graphite costs. eventide though it requires a $2.5 million extra investment, the benefits far outweigh the costs.Because of a high NPV value it is advisable to invest in the Collinsville plant and install the lamination technology. This investment will not only create synergies because of the similarity in the business but also add value to shareholders wealth. * If terminal values are taken as zero (assuming no residual value)then the NPV of Collinsville plant comes out as -$2.928 million. And after installation of lamination the NPV becomes as 3.6 million $. Because of the high NPV value in the later scenario it is advisable to implement advanced Lamination technology while investing in Collinsville plant.