Dow Chemical Case

Dow Chemicals

With this project Dow Chemicals does indeed have a great opportunity to seize the lion’s share of Argentina market for ethylene and polyethylene, as well as to get itself into a very solid position within Mercosur countries, should all the three steps of the projects be conducted as planned. The argument for the strategic importance of the project, supported further by the additional info in the case, therefore, seems convincing enough for the headquarters to approve the deal, provided that the financial argument is just as solid. Hence here we need to concentrate on the financial side of the deal to determine exactly how attractive are all the proposed stages of the project, and how much would Dow be willing to pay for PBB and Polisur.

To conduct the valuation for each part of the project we need to calculate NPV for the projected period of 15 years (13 years for stage 3), and also the terminal value for each stage. The calculation of terminal value is necessary, because the lifetime of ethylene crackers and polyethylene plants is certainly not limited by a couple of dozen years, so the net present value of the projected cash flows will not be a true estimate of the whole project value. At the same time, cash flow projection for periods further than 10-15 years ahead is a virtually impossible task. The concept of terminal value serves to mitigate this contradiction.

To determine the appropriate discount rate for the NPV calculation, we need to look at the rates previously employed by the company to analyze similar projects in the US and incorporate country risk into them (which is done by simple arithmetical addition). An alternative approach would be to calculate the company’s WACC to use as the basis for the discount rate, but the information in the case in not sufficient for such calculation. Since the rates for similar projects are given in the case at 8-10%, we only need to calculate the country risk. To do this, we have taken the yield...