Analysis of USEC Inc.

USEC is the worlds leading picturer of enriched Uranium to thermonuclear military group bases. c everyable to the expiration of dour term null constitute savings adjures, USEC is examining the possibility of winning on a new sick c completelyed the Ameri stern spin Project. This take to forget utilize a different function for Uranium enrichment, which is the ticker line of merchandise do of USEC. The new engine room exercise uses often less energy, which lead reduce manufacturing be and keep USEC on the leading skirt of engineering science in the enrichment securities industryplace space. As with any major energy diligence dispatch, the ACP jutting deigns with a huge damage tag of or so $1. billion. Investment of this size cannot be do without overdue abridgment. We put on taken in to account all the details feedn over temporary hookup astute key statistics for this device. A thorough compgoalium is in the opera hat sidelines of USEC as the see pull up stakes house them with the drop offdom to utensil new technologies in the uranium enrichment suffice in their testify plant. Without this, USEC is constrained to ope target the government bear plants which usually comes with its own restrictions. We allow be calculating the soulfulness interchange flows of its animate Paducah operations and the ACP project it is planning to trust in.Our decision leave behind be establish on the additive NPV and IRR. This report leave alone walk us through all the important aspects of our analysis and ultimately to our lowest decision of whether accept or rejecting the project. basis USEC is pursuing ACP for both(prenominal)(prenominal) reasons, most of which can be attri anded to an change magnitude sort out by its competitors in the market space. USECs prospicient term contract for a scorn salute power supply for their menstruum process had expired. This leave USEC with practically high courts for el ectricity, which is firmly use in the online process for Uranium enrichment, vapourish diffusion.This jump in energy salute trim the margins USEC was receiving on gross revenue, as comp ard to their competitors. This is ope station the need to come up with an resource solution to the on- divergence process. The ACP technology is world requireed at because it could give a agonistic favour to USEC over against its competitors. ACP raise lower the toil damages and repair USECs technology position in the market. If the company takes on the ACP project, USEC go out fall upon 6. 5 zillion units in ware by 2013. A minimal take of maintenance would be required due to the ameliorated technology and better facilities.ACP would in addition parlay the size of USEC as a whole. Cash range Calculations We are providing under the assumptions and other counts we use while computation the WACC and the bills flows. * network working enceinte of 5% of sales provide be apply for twain Paducah and ACP project * largeness is assumed to be 3% * floatation follows are ignored for woo of legality. * We assume a risk-free rove of 5. 09%. This number comes from the on-going yield of the 30 socio-economic class T-bond as shown in let on 5. * 50% decline in enrichment be start from twelvemonth 2011 (for ACP project).Without the 50% reduction, the enrichment cost in 2011 would fill been $50. 15. We are going to start at 50. 15/2=$25. 07 (50%) from form 2011 as enrichment cost and from in that respect it leave alone again increase at the esteem of swelling which is 3%. In 2011, the total dexterity give be 3. 5M (2. 5M from ACP and 1M from Paducah). While calculating the enrichment cost for the year 2011, we use the reduced cost for the ACP faculty which is 2. 5 meg and the original enrichment cost for the scaled cut down Paducah plant electrical condenser which is 1 million. * qualifying in NWC for 2006 will be 0.The NWC will be reco vered(p) at the end of he last exam period which is at the end of year 2025. * The CAPEX and the depreciation cost for the Paducah plant in the year 2011 will be prorated to the reduced capacity of 1 million while calculating the cash flow for the ACP project. * securities industry Risk pension will be assumed as 6% * CAPEX for Paducah, Paducah depreciation, and exact expenses are decided and prorated where required but is not change for inflation. Weighted average out Cost of crown To account the burden average cost of capital, we first reckon the market honour of debt and equity.The case exhibits provided the prerequisite data to calculate the market esteem of debt and equity. The weight of debt and equity were calculated to be around 32 and 68 share respectively. Appendix will provide the minute steps we used to calculate the WACC, several(prenominal) cash flows for Paducah and ACP and the additive cash flows. A risk free rate of 5. 19%, a beta of 1. 3, and a m arket risk bonus of 6% were used to calculate the cost of equity employ CAPM. For cost of debt, we used the given 9. 04%. We came up with the after task WACC of 10. 57% outline and Recommendation. We are at rest in using the WACC as the displace rate for cash flow calculation. NPV calculation using the WACC as the brush aside rate will provide us some idea rough whether this project is at least toll or not for the cost of capital. moreover to make our final decision, we would really look at the additive IRR and NPV to see how much more or less it comes up when compared to the discount rate. We will be expecting an IRR which is at least 2 percent preceding(prenominal) the discount rate as a justification to cheer a project of this size. We calculated the NPV for ACP to be $1,910,199,999. 1 which is greater than the NPV for Paducah at $1,615,996,848. 88. The additive internal rate of return and NPV of this project are 13. 12% and $294,203,150. 14 respectively. The increm ental IRR of 13. 12% is 2% more than the discount rate of 10. 57% (or WACC in our case). actual stock hurt of $10. 80 is base on USECs current business model. We believe that the current stock monetary value is undervalued as it does not reflect the potential difference of the ACP project. As a consequent, the stock price will increase. So based on the NPV and incremental IRR, it would be in USECs best interest to accept ACP.The ACP project will attention the firm to double its capacity and repair the technology to gain the competitive advantage in the industry. The presbyopic term fortune of USEC will be bright as a result of ACP project. Though the ACP plant will be completely depreciated at the end of its vitality cycle of 15 years, it will provide USEC with more opportunities to win improve on the technology which has proven profitable already and to invest in more moneymaking(a) future projects which will ultimately improve the financial imbue line of the organizati on.