Recent events have dramatically altered and created excess demand in the titanium dioxide industry. Sulfate process plants were forced to make major capital expenditures to comply with new environmental legislation and the price of rutile ore increased dramatically. Du Pont had developed its ilmenite chlorine process, a technology that processes at lower grade ores, and maintains a competitive advantage over other firms in the industry. Management currently reevaluated their capacity expansion strategy to see whether or not to expand or maintain their current market share.
(b) Statement of Facts and Assumptions.
We assumed sales of $100 million in 1972 based off of Exhibit 2’s dollar value of shipments. The tax rate was assumed to be 48%, as noted on page 76 footnotes. The terminal value was calculated as the sum of all capital expenditures and the change in working capital.
Du Pont has a few competitive advantages over its competitors as of 1972. Due to the size of the firm and its technological superiority, Du Pont has a dominant position in many markets. Du Pont also has a competitive advantage in the chloride process because of the recent enacted environmental protection legislation, which has made TiO2 production costs much higher. Du Pont will benefit from this because most of its production uses the ilmenite chloride process, which is much cheaper than the processes used by competitors.
Using a 5% discount rate, Du Pont’s growth strategy will have an $886 million NPV and their maintain strategy will have a NPV of $715 million at a 5% (NPV at other discount rates available on spreadsheet). The growth strategy has a higher NPV compared to the maintain strategy for discount rates under 23%. The Internal rate of return could not be calculated because there is no initial outlay for either strategy.
If Du Pont chooses a maintain strategy, they run the...