Du Pont Case Study

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Conclusion/Recommendation

Following my analysis, Du Pont should pursue the growth strategy since the NPV is higher for all discount rates between 5%-12.76%. With a historical industry discount rate of 7.22%, the NPV for the growth strategy is more than double the maintain strategy ($55.66 million to $25.37 million) (Figure 3). Although the IRR for the maintain strategy is higher than the growth strategy (14.62% vs. 13.49%), the significant potential in the growth strategy NPV outweighs the maintain strategy NPV. If Du Pont can successfully implement its growth plans (expanding capacity, achieving forecasted sales, and restricting licensing of ilmenite chloride process), Du Pont will dominate the titanium dioxide market share. Du Pont is also a large, well-diversified company with 10 different departments. The titanium dioxide department is the second smallest of the 10. While still a key part of Du Pont, the risk associated with this department is reasonably mitigated. Additionally, risks stemming from future cash flow uncertainties are minor, because Du Pont currently has the most cost effective and environmentally clean process in the industry.

There were several different ways to do sensitivity analysis. First was changing the growth rate slightly. The reading states that titanium dioxide demand is forecasted to grow at 3% a year, and is not considered sensitive to price. For the downside case, I changed the growth rate to 2% (Figures 4-6), and the upside case to 4% (Figures 7-9). Both cases demonstrate that the growth strategy will still provide a higher NPV than the maintain strategy. The second sensitivity was changing the discount rates. When adjusting discount rates (Figures 6 and 9), the growth strategy remained the better option in both optimistic and pessimistic cases.

Figure 1: Du Pont’s Maintain Strategy- Base Case

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Incremental Cash Flow = Incremental EBIAT + Investment Tax Credit – Incremental CapEX – Additions to Net Working Capital + Recovery of Net Working Capital + Recovery of Property, Plant, and Equipment

Figure 2: Du Pont’s Growth Strategy – Base Case

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Figure 3: Du Pont’s Cash Flows & NPV – Base Case

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Figure 4: Du Pont’s Maintain Strategy- Pessimistic Case [pic 5]

Figure 5: Du Pont’s Growth Strategy- Pessimistic Case [pic 6]

Figure 6: Du Pont’s Cash Flows & NPV – Pessimistic Case [pic 7]

Figure 7: Du Pont’s Maintain Strategy- Optimistic Case [pic 8]

Figure 8: Du Pont’s Growth Strategy- Optimistic Case [pic 9]

Figure 9: Du Pont’s Cash Flows & NPV – Optimistic Case [pic 10]

Figure 10: Selected Financial Information – 5 Year Financial Summary

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Figure 11: Selected Financial Information – 5 Year Financial Summary [pic 12]

Figure 12: Selected Financial Information – Titanium Dioxide Production by Type

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Figure 13: Selected Financial Information –Market Forecasts

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Sources

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/wacc.htm