American Chemical Corporation Essay

Statement of the problem In October of 1979, the American Chemical Corporation (ACC) began looking for a buyer for the Collinsville, Alabama seed aft(prenominal) successfully getting 91% of the sh ars of prevalent Paper Corporation. Dixon Corporation, a specialist chemic company with customers primarily in the stem and pulp industry agreed to the possibleness of purchasing the Collinsville plant for $12 million. This corrupt will diversify Dixons result line, adding the atomic number 11 chlo measure chemical, produced at the Collinsville plant, needed by its existing customers. Dixon is evaluating different streams of cash clings for the adventure of purchasing the Collinsville plant.Discussion The decision to pull in Collinsvilles plant will interpret into strategic and economic benefits. Dixon could outgrowth their cater of chemical products to their existing clients. However, stolon we looked in to the risk of the possible venture. Dixon has never produced sodium chlorate which could add risk to the new venture. For this causation we calculated the beta of the project base on the beta of the sodium chlorate industry. We cogitate 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 using its birth target capital structure of 35% ends with a beta of 1.59. The beta obtained is employ to derive the CAPM method, resulting in a 21.45% live of equity. We assumed 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 second-rate cost of capital (WACC) for Collinsvilles plant cash flow is nearly 16%. This ratio will be apply to evaluate the different NPVs of the projects.To recognise an positionment decision three scenarios hand over been analyzed. The first and second scenarios are to pa y the plant in 5 geezerhood or 10 years on an individual basis both with a zero remedy value at the end of the term. The terce option is to purchase the plant with a laminated engineering science, ACCs technical support, and zero lay aside value at the end of the term. The first two alternatives resulted in negative NPVs of ($1,928) and ($1,932) respectively, by dint of an incremental cash flow analysis. However, acquiring Collinsville with the laminated technology will result in a positive NPV of $4,960, as surface as,reducing the electric power by 30%, and the possibility of adapting this technology to former(a) plants to reduce operating costs.Recommendation establish on our analysis, we recommend that Dixon Corporation invest in Collinsville with the laminate technology. Any of the other options, establish on our incremental cash flow analysis, resulted in negative NPVs. We recommend investment funds in nothing other than the laminate technology project for the benefit o f the shareholders. However, Dixon should make an learnedness agreement protecting itself in contingency the laminate technology fails in providing expected results. It should be stated that ACC should compensate Dixon for any origination charges. The acquisition of the plant will increase wealth to the shareholders, as well as, accompaniment the supplying of chemical products to our existing clients.