Victoria Chemicals Is Considering a Case Study

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Once this is done, the NPV of the project will naturally improve, because the cash flows are not affected in any negative way otherwise. The project has a positive net present value and therefore meets the financial criteria set by the organization. The project also makes sense strategically and improves the competitiveness of the organization. It should be accepted on those grounds as well.

While the capital budgeting process does reveal some issues within the organization, the time and place for resolving those issues is not during the capital budgeting process itself. Thus, a further recommendation is that Victoria Chemical focuses its energy on learning from this experience, and making its capital budgeting process better, and if need be the company could also make changes to its organizational design. Bear in mind that some of these issues arise because other divisions prefer not to have the Merseyside operation affect them negatively, as the heads of each of these divisions received bonuses based on the performance of their division. A system that encourages systems thinking and a focus on overall corporate objectives in the executives is something that needs to be addressed by Victoria's human resources department, not by Greystock.

A final recommendation is to take into consideration the long-term impacts of the loss of business that would occur as the result of shutting the plant. Greystock is assuming that the business will come back, but in a competitive marketplace that is not a reasonable assumption to make. It is more logical that the company assume some loss of business, and build that into the model.

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The Sales Department is going to need to make smarter contributions to the projections in this regard.

Overall, the recommendation from Greystock should be to proceed. He should discuss the other issues with Morris, because she should be aware of the bigger organizational issues that have arisen as the result of this capital budgeting process. In particular, he should make sure she is aware that Tewitt wanted to go rogue with his plans, if she is not already aware. That is an internal discipline issue, and Tewitt's suggestion could have had them all fired.

At the end of the day, Greystock needs to put together the most honest and accurate set of projections possible, and render a go/no-go decision based on those figures. Whether the proposal is accepted or not, and the specifics of its implementation, is not really his concern beyond how implementation affects the financials. Greystock's duty to the shareholders is to proceed with the highest levels of integrity and honesty, and his duty is certainly not to accommodate the politicking and turf-defending within the corporation. In producing the best numbers possible, he will find that the project has a positive net present value, and therefore increases shareholder wealth. This leaves him with a 'go' recommendation.

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