Executive Summary Statement of the Problem In October 1979, Dixon Corporation (Dixon) is considering the purchase of a sodium chlorate

plant located near Collinsville, Alabama. The acquisition of the Collinsville plant would support Dixons strategy of supplying chemicals to the paper and pulp industry. The plant is currently operated by American Chemical Corporation (American), who has offered to sell the plants net assets for $12 million. American has been developing a permanent laminate to apply to graphite electrodes made in the plant, which would eliminate graphite costs and reduce the power needs of the plant by 15-20%. It can be installed in December 1980 for $2.25 million, which would then be depreciated over a period of 10 years. Dixon has several options: it can choose not to install the laminate technology and sell the plant at the end of either 5 or 10 years, or invest in the laminate and sell the plant at the end of its life of 10 years. If Dixon chooses to purchase the plant, it plans to fund the entire purchase with debt at a target debt ratio of 35%. A net present value (NPV) analysis will be used to determine the value of installing the laminate technology as well as whether Dixon should approve the acquisition at the price offered. Discussion After comparison of the unlevered betas of similar pure-play sodium chlorate manufacturers, the result was levered at a 35/65 debt-to-equity ratio to get a 1.59 beta for the investment. At a 48% income tax rate, the weighted average cost of capital is 16%. Dixon has the option to purchase the plant and choose not to install the technology, instead selling the plants assets at book value at the end of 5 years. The total present value of inflows amounts to $10.07 million, giving the acquisition an NPV of ($1.93) million for this option. Dixon is also considering continuing the cash flows to the end of the plant life of 10 years. Instead of selling the plant, Dixon would scrap it at zero salvage value for a tax benefit of $1.59 million. If Dixon chooses not to install the laminate technology, the total present value of inflows would equal $10.07 million, leading to an NPV of ($1.93) million. On the other hand, Dixon could choose to install the laminate technology at the plant and run it through the end of its useful life of 10 years. Assuming that the technology would yield a power cost savings of 17.5%, the NPV of the $2.25 million investment is $4.96 million. Therefore, choosing to install the technology and run the plant for 10 years would result in a positive NPV of $3.03 million. Recommendation Dixon should install the laminate at the Collinsville plant once available, and run the plant through its useful life of 10 years. The Collinsville plants inflows alone are not enough to justify the $12 million purchase price: both the 5 and 10 year options bring in only $10.07 million. If American is willing to reduce the price of the plant below $10.07 million, then Dixon would have justification to purchase the plant regardless of whether or not the laminate technology research came to fruition. However, assuming that installation of the technology will be provided as promised by American, Dixon should proceed with the purchase. The NPV of the technology investment is $4.96 million, which added to the plants NPV of ($1.93) million comes out to a positive $3.03 million NPV for the total upfront investment of $14.25 million.