Case-USEC INC.

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BUAD-6200:921– Corporate Finance

SummerII - 2020

CASE -1 “USEC INC.”

Please send it to Blacboard “MESSAGES” as attachment

The case study would be best to be analyzed/prepared by a group of two-three students. However, I will not impose random groups. Those who would like to work as a group please communicate and form your group.

I will also accept individual work due to online class. I understand that working as a group under these circumstances may be hard for some.

By the end July 24, Friday, 2020, please let me know how you are going to handle the case, either as one individual or as a group with member names through Blackboard.

So, either as a group, or individually, you are going to work on the following case.

You should keep in mind the following four points in your calculations and arguments.

· First, be aware of the year the case was written.

· Second, all the calculations and evaluations should be based on the information in the case.

· Third, you should think of yourself as part of the decision making team working on the project.

· Fourth, your results will be quite sensitive to assumptions you make. Clearly state your assumptions and then do your calculations.

· Last, you must write your case as a paper, not as a homework assignment answering the homework questions.

· In short, you must write in a professional way. Just think that what you write will be in front of your boss who is going to make decision on the project and ready to ask questions to you.

Assignment Questions!

Please do not write your paper as answers to the following questions. They are just to give you some guidelines and things not to avoid

1. Why is USEC pursuing the ACP? Briefly discuss USEC’s business and what advantages would ACP bring to the table.

2. What is USEC’s weighted-average cost of capital (WACC) in July 2006? Are you comfortable using this discount rate for the ACP?

3. Using the financial data in the case, what is your estimate of the American Centrifuge Project’s NPV and IRR?

HINTS: When building the cash-flows for the project, keep in mind the following information that will help you focus and eliminate some of the likely outcomes based on other assumption. This is important because this can be a quite complicated case!

· Remember that your analysis is supposed to consider INCREMENTAL cash flows. If USEC does not take the ACP project, they will continue to use the gas-diffusion technology at Paducah for the enrichment process that they have right now. This means you will have to calculate two sets of total cash flows – one for continuing with Paducah, and one for the ACP; then calculate the NPV, IRR of the incremental cash flows (ACP-Paducah). My suggestion is to build Paducah cash flows first (for the first five years of the analysis, the only difference between the two projects should be the large long term investment for the ACP presented in Table 1).

· Mind the company’s inflation assumption – you need to work with nominal cash flows in order to maintain consistency with the discount rate!!! (be careful about which lines increase with inflation).

· Consider a marginal tax rate of 40%.

· Assume that Selling, General and Administrative (SG&A) expenses are 4% of your gross revenue.

· You can safely ignore the “net-working capital liquidation value” data presented in Exhibit 3 (Mackovjak did not find it relevant for his analysis either).

· Uranium inventory – do not model the uranium inventory as a separate line, as it will get too complicated. Assume that the NWC assumption (5% of sales) INCLUDES any inventory effects.

· Price of Uranium - When recording your costs of goods sold, there are good arguments to be made for keeping track of the uranium either at its Book Value ($20/lb), or at the market value ($43/lb). Because the case states that USEC did sell its inventory on the open market, use the market value of uranium in your Discounted Cash Flows analysis.

4. Based on your analysis so far,

· What is your recommendation about the proposed investment?

· Should USEC take it or not?

· If they decide to take the project, would it increase or decrease their stock value? WHY?

Please Note:

· Your case write-up must not be more than 3-pages long, excluding the tables and/or excel spreadsheet. (Double space, 11 or 12 font sizes).

· You will have to put your tables and excel spreadsheet(s) to the appendix. I need to see your calculations in these spreadsheet(s).

· Your paper must be a professional one: it is as if you are writing it for the CEO/CFO of the company.

· Do not forget the title page, page numbers, references, etc. They can be source for point deductions.

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