FINANCE HW: CASE STUDY WRITE EXECUTIVE SUMMARY 1 PAGE

Introduction

USEC was the world’s leading supplier of enriched uranium fuel for commercial nuclear power plants. USEC’s unique business model carried with it significant influence from the U.S. government through its contractual obligations with the Department of Energy (DOE). USEC faced only three major competitors: AREVA/Eurodif (France), Tenex (Russia), and Urenco (Germany). Through the Megatons to Megawatts government program USEC facilitated the conversion of weapons-grade uranium by buying the uranium from the Russian government and then selling it as fuel to commercial power-generating companies. The Megatons to Megawatts agreement stipulated that USEC would buy the equivalent of 5 million pounds of uranium each year at a fixed price of $20 per pound. USEC was in the beginning stage of a massive capital-expenditure project known as the American Centrifuge Project (ACP) that would almost double the scale of the company and dramatically improve its competitive position.

Analysis

Mackovjak has to analyze USEC, and the American Centrifuge Project in order to recommend either buying the stock (a long position) or short sell stocks (a short position). If Mackovjak found the American Centrifuge Project to be a value-creating investment, one in which had a positive NPV on discounted cash flows, it would imply that the USEC stock was undervalued and you should take a long position in buying. However, if the American Centrifuge Project was a value-destroying investment, one in which had a negative NPV on discounted cash flow, the stock should be short sold to take advantage of the stock being overvalued by the market.

Recommendation

When looking at the Excel spreadsheet for USEC it is clear to see that the American Centrifuge Project is a value-creating investment. When looking at NPV of the ACP it is clear to see that value is created by the project this would mean that the stock was undervalued and that you should purchase additional shares. In taking the long position you are investing in the firm and its future success in the belief that the value of USEC’s stock will increase overtime. Success of the firm isn’t entirely based on NPV, but it does show that the American Centrifuge project will yield positive net discounted cash flows once the initial investment has been made. The stock value should increase if the decision and recommendation prove to be accurate, and financially profitable.

Conclusion

The American Centrifuge Project seems to be a worthwhile investment. It yields positive cash flows overtime which leads to a positive NPV for the project as a whole. This creation of value by ACP means that you should take the long position on USEC Inc. and purchase additional shares in the belief that overtime in the and in the long run the stock price will go up.