Using the forecasts provided in the DuPont case, the free cash flows for years 1972-1985 were

estimated using the following equation for both the Growth (see Exhibit 1) and Maintain (see
Exhibit 2) strategies:

EBIT t ( 1−T c ) + Depreciationt −∆ WC t −CAPEX t

The Terminal Value was estimated using a non-growing perpetuity model and the NPV for both
strategies (Growth and Maintain) were calculated using the following equation:

T
EBIT t ( 1−T c ) + Depreciation t −∆ WC t −CA PEX t TV T
∑ (1+ r)
t
+
(1+r )
T
t =1

An interest rate of 14% was used in the calculating of both Exhibit 1 and 2.

In analyzing the data we take a conservative approach to be able to provide a fair and balance
analysis due to the potentially bias numbers which provided by the Pigments [Link]
have been provided. Therefore we calculate the terminal value under the assumption that
there is no growth over the time period (g=0). Due to the fact that these free cash flows are
estimated using a forecasted growth in demand for TiO2 of 3% annually, there is some
risks/uncertainty tied to these calculations. First is the fact that these estimates in demand are
assumed to not be price sensitive, which in an economical sense is not realistic. Data provided
by the Pigments department shows price increasing under both strategies by above 200% over
the time period. Such increases, even after accounting for inflation, seem speculative. Next is
the possibility of the discovery of a substitute chemical for TiO2 in the paint business which
would obviously have a negative effect on the growth in demand. In addition, potential risk
exists for both strategies with the strengthening of US $ and the 10% swings due to cyclical
demand increases the difficulty in accurate predictions of future cash flows. Lastly, another
factor that is not considered in these free cash flow estimates is the idea that some of the other
major competitors could engineer a similar method to DuPont’s processing of TiO2 and regain a
share of the market. By looking solely at the NPV of the growth strategy, it would seem to
make the most sense for DuPont. However, there are risks involved that need to be
considered. However, wWith an interest rate of 14%, it might not be worth taking the risks for
such a minimal increase in NPV.

Because DuPont already has an affordable processing method of TiO2 in the paint producing
business, they have captured a large share of the paint market. Around 1972, new
environmental standards caused a huge increase in the price of mill costs for TiO2, which gave
DuPont a significant cost-advantage over other processes in the market. DuPont, once a
significant player in the paint market with NL Industries, is now poised to take over the majority
of the market with their tried and true TiO2 process. DuPont can choose to either continue
their strategic market move of maintaining their annual revenue, or they can choose to take
advantage of this opening in the market as an opportunity for growth for their company.

The financial analysis presented by the Pigments Department could be received as “suspicious”
considering that they are the second smallest department at DuPont as far as sales are
concerned. In our efforts to counter balance such a possibility while maintaining our
conservative approach we calculated yield using BAA percentage 7.8% instead of DuPont’s AAA
rating yield of 7.2% due to the Pigments segment being one of the smaller units within
DupontDuPont and the potential risks that are associated with it. The Pigments Department
could possibly have “cooked” the financial analysis to win approval in order to bring some
growth to their department, so it is important to careful analyze both strategies. If the
Maintain strategy is chosen by DuPont, they have to take into consideration that competing
companies might try and develop an new and environmentally safe process for TiO2 that is
similar to DuPont and go after the market. This could eventually mean a huge decrease in sales
for DuPont. If DuPont chooses the Growth strategy, they will be looking at taking advantage of
their already used process to grow their business and build on the opportunity in the TiO2
market. This could eventually lead to all other competitor’s dropping out of the TiO2 business
all together; assuming DuPont gathers a large percentage of the market and the competitors do
not develop a process themselves. However, this is assuming that the Pigments Department
did not cook the numbers and the estimate for growth in demand of Ti02. If the growth in
demand does not increase as predicted, and DuPont chooses the Growth strategy, they could
potentially lose a lot of money. None the less, there is no denying the recent environmental
litigationregulations that were set forth, which in this case isare the greatest advantage to
DuPont’s success in the market.

At this point in time, we suggest DuPont to pursue the Maintain strategy. The NPV is not that
much higher with the Growth strategy that it’s worth taking the amount of uncertainty and risk
associated with the Pigment Department’s financial forecasts. A change in interest rates does
not seem to have a much of an affect on the difference in NPV between the two strategies
(Exhibit 3), so this would not affect our decision to pursue the Maintain strategy.