U sec Inc. Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

U sec Inc. Case Solution

Introduction

USEC is leading supplier of the enriched uranium fuel for the commercial nuclear power plants. It was created as the government corporation to help the government in the uranium-enrichment operations. However, it was later privatized, and soon was being listed at the stock exchange.

Moreover, the company has the 50% share in the North American market, and 30% global market share, it has three major market competitors, one AREA/Eurodollar(France), Tenet (Russia), and Encore (Germany).

Similarly, USEC was considering to develop a project American Centrifuge Project (ACP) by the company would be able to get competitive advantage over the competitors in term of technology. In addition, it would be able to lower its cost of production, and increase capacity as well. Furthermore, the project itself cost around $1.7 billion, which would be completed within next five months.

Moreover, the project would have expected life of 15 years, having no salvage value at the end of life, but indeed would increase the revenues of the company, and production capacity as well. It could further reduce the electricity by 95% required for the enrichment process, and also overall enrichment cost by 50%.

However, it is very important to know that would company able to provide value for its shareholders. Because, rising prices of the uranium might slow down market demand. Thus it is necessary to evaluate the project from the different dimensions.

WACK as discount rate

Weighted average cost of capital (WACK) is minimum rate of return that investors expect from the investment. It is most appropriate rate the gives real picture of whole investment, because it is calculated through combining two costs; cost of cost of equity, and cost of debt.

The USEC has the WACK of 9.88%, which is being calculated through the given data. However, the question arises that does this WACK compensate the risk associated with the company or the project. So, in order to know that, we should examine the industry key drivers and some other variables that might increase the risk of the project.

However, if we analyze the company, than it is supplier of the enriched uranium to the commercial nuclear power plants in the Us, and around the world. On other hand, there is competition, and growth in the market; however, more demand of the enriched uranium might decrease in response to the rising prices.

Furthermore, with the concerns of the investors, WACK is attractive and compensates the risk associated with the project. Because the company has the beta of 1.3, which means that it is more sensitive to the market fluctuations. On other hand, the risk-free rate is 5.09%, along with the market risk premium of the 6%.

These three inputs of the play important role in the calculating WACK, on other hand, company’s capital structure is Equity: Debt 63%, and 37% respectively. Thus, the WACK is comfortable for the investors. See Exhibit 1

Net Present value

Net present value of the project is calculated by discounting the future cash inflows over the life of project. On other hand, the ACP project has positive cash inflows throughout its life. The initial cost of the project was $1.7 billion.

Furthermore, the net present value of the project is $19.13 million. The cash inflows were discounted with the discount rate of 9.88%. Moreover, the project has the internal rate of return 10%. Which shows that project would be able to generate return for the investors.

On other hand, the IRR is more than the WACK, which means that investors are secured by the proper weighted average cost of capital, that compensate the risk associated with the project. Thus the investment in the ACP would be profitable for the investor, and for company to invest in the project, and provide value for the investor.

U sec Inc. Harvard Case Solution & Analysis

In addition, to approach the proper value of the investment return, the 6% growth rate was assumed by considering the key factors in the market, like rising demand of the enriched uranium, and rising prices of the uranium.............

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