CASE ANALYSIS: USEC INC Harvard Case Solution & Analysis

Case Analysis: USEC Inc Case Solution

Case Analysis: USEC Inc.

1         Advantages and Reasons behind Pursuing USEC’s Business

There are several reasons for which the company is pursuing the investment opportunity. The main reason is that the business is able to reduce the cost of the company and to increase its revenue. Ultimately, the business will increase the overall profitability of the business. In addition, the company can increase its overall value and long term profitability while investing in the USEC’s business. Furthermore, the company can gain and add substantial value to the overall business after engaging and investing in the business.

Moreover, the company is taking advantage from the long term agreement and due to that agreement among the DOE and other countries, the cost of the Uranium was fixed and it was expected to increase at a significant rate. However, in 2005 the company incurred a heavy cost of enriching and procuring the uranium because of the expiry of the agreement.

Therefore, the company was pursuing an opportunity which could increase the overall business value and able to increase its overall profitability. Lastly, the stock of the company is currently traded on $10.80 which can be increase by investing and moving towards the American Centrifuge Project.

Moreover, the maximum capacity of the current plant is 3.5 million pounds which cannot be increased by a higher amount whereas, on the other hand, the ACP project will incur a cost of 1.7 billion while it will start to give inflows from 2011. However, the production capacity of this plant would be 2.5 million pounds, 4.5 million pounds 6.5 million pounds per year. Finally, the plant is also capable to reduce the cost of the company in a tremendous way and ultimately it is able to provide numerous advantages to the company.

2         WACC for USEC Inc.

WACC has been calculated by using the given information (appendix 1). The market risk premium is 6% while the risk free rate has been taken from the treasury bonds of 10 years which is showing a rate of 5.04%. Moreover, the tax rate was assumed as 40%, however, the cost of debt was taken from the interest rate and long term debt (to keep the calculations simple) while the beta of the company is 1.30 which is very aggressive since, the company is highly associated with market risk and fluctuates 30% extra from the market movement. In addition, the cost of debt indicates a rate of 8.42% and the cost of equity which has been calculated through the Capital Asset Pricing Model (CAPM) is showing a rate of 12.84%. Lastly, the WACC of the company is 8.45%,which has been calculated for the discussed information.As far as the stocks of the company are concerned, it can be said that the project can increase the value of stocks but only on a condition thatthe company doesn’t issue stock dividends or it should avoid additional stock issuance.

3         Comparison among Paducah and ACP project

The cash flow valuation of the Paducah plant has been made from the forecasted income statement and balance sheet. Moreover, these statements were made through the simple forecasting method known as the Navvi method. The variance of pervious years has been calculated and after which the valuation of the project has been made. Afterwards, the expected discounted cash flows of the project have been calculated, which show a discounted amount ranging from 103 to 72.5 million from the year 2006 to 2011 (appendix 2).Moreover, the NPV and IRR of the project have been calculated and it has been found that the project will have a NPV of almost 521 million while it will have IRR of 59%. This shows that the project also has a great profitability potential and it can able to add up significant revenue and value for the company.............

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