Dupont Case Study

E.I. du Pont de Nemours & Co.: Titanium Dioxide

Case Questions

Two strategic options are considered in this case: a “growth” strategy and a “maintain” strategy. You have been asked to provide advice to the committee that will meet to consider these strategies. Please address the following issues in a report that contains no more than 3 pages of text and a few supporting exhibits.

1. Very briefly describe what Du Pont’s competitive advantages were in the TiO2 market back in 1972, and how permanent these advantages seemed to be.

2. Describe in no more than one-half page how the incremental cash flow is calculated in the case of the growth option. Specifically, explain why the incremental revenue from old capacity needs to be included in the cash flow calculation (i.e. why shouldn’t we only look at the value effects associated with the new capacity).

Incremental Cash Flow is stands for the additional operating cash flow that Du Pont receives from taking on this project/making this investment. A positive incremental Cash Flow means that Du Pont’s Cash Flow will increase with this project/investment.

It is calculated by subtracting incremental outflows from incremental inflows and adding the terminal value.

Incremental Inflows is calculated by Adding investment credits to total incremental EBIAT.

Incremental outflows is calculated by taking the incremental capital expenditures and subtracting or adding additions to net working capital (which is calculated by taking total incremental revenue and multiplying it with the net working capital rate)

3. Based on the incremental cash flows for the growth and maintain strategies provided in the spreadsheet, which strategy looks more attractive? Consider alternative decision rules (e.g., NPV vs. IRR) when making your decision.

For budgeting applications with only one single discount rate, using the IRR to decide is better. Since the discount rate is not changing over time, it is better to use the IRR because...