American Chemical Corporation Essay

Statement of the problem In October of 1979, the American Chemical Corporation (ACC) began aspect for a buyer for the Collinsville, Alabama plant after successfully getting 91% of the shares of Universal Paper Corporation. Dixon Corporation, a specialist chemical substance lodge with customers primarily in the paper and pulp industry agreed to the supposition of purchasing the Collinsville plant for $12 million. This leverage pull up stakes diversify Dixons product line, adding the sodium chlorate chemical, produced at the Collinsville plant, needed by its existing customers. Dixon is evaluating polar streams of money 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 add on of chemical products to their existing clients. However, original we looked in to the risk of the possible venture. Dixon has neer produced sodium chlorate w hich could add risk to the new venture. For this reason we calculated the important of the project based on the important of the sodium chlorate industry. We focused on Brunswick and Southern Chemical which are pure play sodium chlorate companies.The mean(a) unleveraged beta obtained from the two companies is 1.035 which reflects the risk of the project. Adjusting Dixons beta by re-levering it apply its own target capital structure of 35% ends with a beta of 1.59. The beta obtained is used to derive the CAPM method, dissolving agenting in a 21.45% cost of equity. We simulated 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 average out cost of capital (WACC) for Collinsvilles plant cash flow is most 16%. This ratio will be used to evaluate the antithetic NPVs of the projects.To make an perpetratement decision three scenarios have been analyzed. The first and second scenarios are to finance the pla nt in 5 days or 10 years respectively both with a set salvage honor 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, by 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 galvanic power by 30%, and the possibility of adapting this technology to other plants to constrict 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 naught other than the laminate technology project for the benefit of the shareholders. However, Dixon should make an acquisition pl edge 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.