DIAMOND CHEMICALS PLC.

Diamond Chemicals PLC.

Diamond Chemicals PLC.

Introduction

This research study is based on the case study of Diamond Chemicals PLC. Which is a chemical company? The purpose of this research essay is to conduct the capital budgeting effectiveness.

Literature Review

The first article is about the different perspective on using multiple internal rates of return: the IRR parity technique. This article states that the traditional internal rate of return (IRR) method of project selection has been shown to be inferior to the NPV method due to various problems of the IRR (Irfan, 2005). For instance, the basic IRR method cannot rank mutually exclusive projects, the project with higher IRR potentially having lower net present value (NPV); and the IRR rule cannot readily be used in case of multiple real IRRs, which can occur when there are multiple changes in the sign of the cash flows. Thus NPV is preferred strongly by academicians as the criterion for investment decisions. Yet despite the clear advantages of the NPV rule, surveys (for example, and indicate that many business practitioners prefer IRR over NPV (Irfan, 2005). This is because business practitioners find the IRR method easier to understand than the NPV because the IRR can be calculated (though not used) without having to estimate the cost of capital, and the IRR, expressed as a percentage rate of return, is more intuitively appealing to evaluate investments and to communicate profitability(Irfan, 2005).

The preference for the IRR among practitioners regardless of its apparent drawbacks has motivated numerous efforts to improve and modify the IRR method to methodologies that are more consistent with the NPV than is the traditional IRR method (Irfan, 2005). The modified IRR (MIRR), which assumes that cash flows from all projects are reinvested at the cost of capital rather than the project's own IRR, was proposed by Lin and Beaves. It indicates relative profitability of projects better than the IRR but it cannot correctly rank order projects with different sizes. Shull and Hajdasinski adjust and improve the MIRR so the adjusted MIRR approach can rank order projects with different sizes in an NPV-consistent manner. McDaniel et al (Irfan, 2005). Compute the marginal return on invested capital (MRIC). The MRIC is reasonable because it separates cash flows into external capital funds required and internal operating cash flows. Then [(1 + IRR).sup.T] is computed as the ratio between the terminal value of the internal operating cash flows and the present value of the externally financed funding (Irfan, 2005). Hazen shows that the traditional IRR method with 1-nultiple internal rates of returns in fact is consistent with the NPV in accepting or rejecting the cash flow stream, regardless of which IRR is used, given that one properly identifies the underlying investment stream as net investment or net borrowing (Irfan, 2005). Hartman and Schafrick present a method of identifying the relevant IRR from among a set of real IRRs and using only the relevant IRR in decision making.

The second article is about how to value your deal like an ...