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USEC Capital Budgeting Case Questions
In one paragraph (max 5 sentences), describe the general situation faced by USEC:
USEC is the lead supplier of enriched uranium, which is used to fuel nuclear reactors. Due to an expiring contract with a power supplier, the production of Uranium fuel became very expensive at the current Paducah plant. USEC created a new plant called APC in an attempt to advance technology and become the low cost producers in the Uranium industry. Mackovjak is a financial analyst tasked with the evaluation of USEC. In order to properly value USEC, Mackovjak needs to evaluate APC and their contributions to USEC.
2) What is the Weighted Average Cost of Capital for USEC in July 2006? (Assume the expected return on the market is around 11%)
WACC=
WACC=
WACC= .10703
We calculated a = .134 which we calculated using the expected return equation: . Our equation looked similar to this:
For the equity we assumed the number of shares outstanding for 2006 which was 86.1 million *10.8 (price per share) 930 million
The debt was given in the capital market conditions at 475 million (making D+E equal 1405 million)
For we used the yield to maturity, which was given at 0.0904
The tax rate was estimated based on the 2005 data to be roughly 40 percent.
WACC=
3) After determining the relevant Cash Flows for the project, what is the NPV?
*FCF were calculated in the excel spreadsheet We were using a $20 fixed price due to an agreement for the Uranium however this changed as the agreement expired and we were required to buy Uranium at market price.
Sales= (Production *SWU price)
Cash Costs= (Production of APC* Market price )+ (Production of APC* Enrichment costs)
*When APC became functional, enrichment costs were reduced by half
Non Cash Costs= Depreciation
Current assets= production* inventory (this was only used in 2012) Market price* production (was used for 2013 and after)
Current liabilities= 1 % of DOE for initial research of
In one paragraph (max 5 sentences), describe the general situation faced by USEC:
USEC is the lead supplier of enriched uranium, which is used to fuel nuclear reactors. Due to an expiring contract with a power supplier, the production of Uranium fuel became very expensive at the current Paducah plant. USEC created a new plant called APC in an attempt to advance technology and become the low cost producers in the Uranium industry. Mackovjak is a financial analyst tasked with the evaluation of USEC. In order to properly value USEC, Mackovjak needs to evaluate APC and their contributions to USEC.
2) What is the Weighted Average Cost of Capital for USEC in July 2006? (Assume the expected return on the market is around 11%)
WACC=
WACC=
WACC= .10703
We calculated a = .134 which we calculated using the expected return equation: . Our equation looked similar to this:
For the equity we assumed the number of shares outstanding for 2006 which was 86.1 million *10.8 (price per share) 930 million
The debt was given in the capital market conditions at 475 million (making D+E equal 1405 million)
For we used the yield to maturity, which was given at 0.0904
The tax rate was estimated based on the 2005 data to be roughly 40 percent.
WACC=
3) After determining the relevant Cash Flows for the project, what is the NPV?
*FCF were calculated in the excel spreadsheet We were using a $20 fixed price due to an agreement for the Uranium however this changed as the agreement expired and we were required to buy Uranium at market price.
Sales= (Production *SWU price)
Cash Costs= (Production of APC* Market price )+ (Production of APC* Enrichment costs)
*When APC became functional, enrichment costs were reduced by half
Non Cash Costs= Depreciation
Current assets= production* inventory (this was only used in 2012) Market price* production (was used for 2013 and after)
Current liabilities= 1 % of DOE for initial research of