USEC Capital Budgeting Case Questions

In hotshot paragraph (max 5 sentences), describe the general situation faced by USEC USEC is the lead supplier of enriched uranium, which is utilise to fuel nuclear reactors. Due to an expiring vex with a power supplier, the production of Uranium fuel became rattling high-ticket(prenominal) 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 target to properly value USEC, Mackovjak needs to evaluate APC and their contri thoions to USEC.2) What is the Weighted sightly Cost of Capital for USEC in July 2006? (Assume the judge return on the commercialise is around 11%)WACC= .10703We calculated a = .134 which we calculated using the expected return equation . Our equation looked similar to this For the equity we assumed the look of sh ares outstanding for 2006 which was 86.1 million *10.8 (price per share) 930 million The debt was given in the capital grocery conditions at 475 million (making D+E equal 1405 million) For we used the deed over to maturity, which was given at 0.0904 The tax rate was estimated based on the 2005 selective information to be roughly 40 percentage.3) After determining the relevant switch over Flows for the labor, what is the NPV? *FCF were calculated in the excel spreadsheetWe were using a $20 intractable price due to an commensurateness for the Uranium however this changed as the agreement expired and we were required to buy Uranium at market price. gross sales= (Production *SWU price)Cash Costs= (Production of APC* Market price )+ (Production of APC* Enrichment cost) *When APC became functional, enrichment cost were reduced by half Non Cash Costs= DepreciationCurrent additions= production* parentage (this was only used in 2012) Market price* production (was used for 2013 and after) Current liabilities= 1 % of DOE for initial research of cen trifuge technology Net working capital= current assets current liabilities (we found the change in Networking capital) Operating change flow= S-C(1-T)+TDChanged in fixed asset= capital expenditureWe used these values to calculate a future cash flow using the equation FCF= operating cash flow -increase in networking capital -increase in fixed assets.In order to find the NPV of the project we took the FCF from ACP alone. We had to grant that the lease on Paducah was non associated with ACP, however a one percent royalty was added to current liabilities on the ACP projecting. In order to check our initial estimation we compared the networking capital of the APC project to 5% of sales that was recommended by another analyst Craig Weise. Every year the value was positive and to a higher place 5% reinforcing our decision that USEC will take on the project. Based on our calculated NPV of the project we determined that APC would return 2,020,167,627 dollars.The cost of the project is 1 .7 billion so the difference in return and cost is a positive 320,167,627 dollars. Thus USEC will take on the project and thereof the company is undervalued. Mackovjak, the financial analyst, seeing that the company is undervalued should pitch to upper heed they should take a long position in USEC.From the syllabus Write-ups should be self-contained Word documents, running 2-3 pages or less, including exhibits. Separate spreadsheets containing original calculations should be attached to the email, but exhibits should be placed within the Word document, not left to be found somewhere in the spreadsheet. Please adapt to these exhibition expectations in future write-ups. As to your spreadsheetFor Paducah, the CFs shown would be irrelevant, as with ACP, Paducah operates in 2006-2010, and without ACP, Paducah operates in 2006-2010, so Paducah CFs irrelevant to ACP valuation in 2006-2010. But inevitable to estimate from 2006-2010, so that when wooly 2011-2025, Paducah CFs arealready escalated and easily estimable. In that regard, all CFs to the NPV calc are too high as you have include irrelevant 2006-2010 CFs for Paducah, but more importantly, have ignored all Paducah CFs lost from 2011-2025 as suggested by the case comments given in class the preliminary day to case discussion.Further, your Paducah OCF format of (S-C)(1-T)+TD should only contain cash costs in C and your spreadsheet shows that C contains Capital Expenditures. Capital Expenditures is ALWAYS orthogonal of OCF, with (S-C)(1-T)+TD ChgNWC Yearly CapEx., which you do, thus effectively threefold deducting for CapEx. You did not return NWC at the end of the project.For ACP, Uranium Costs are basically ZERO in your valuation after 2012. This error SEVERELY underestimates costs, and overestimates FCF and thus NPV. Further, in your double 2011 method, a Uranium cost of $21? Where is this from? For Depreciation in ACP, you are using Depreciation for Paducah (Old), not the Capitalized Plant Bldg costs . Further, your analysis does not seem to include the $1.7b cost anywhere, other than in the text of this document where you plainly take a t=0 PVCF and subtract amounts that sum to $1.7b, but occur across 5 years (thus ignoring discounting of the capital costs, and including 100m of a drop down cost in your NPV). Finally, your methodology of PVg does not use the spreadsheet effectively. As with any aphonic number entry, if you wanted to change this, you would have a significant task ahead of you.Please think about using functions, or at the very least using equations that refer to a angiotensin converting enzyme cellphone containing WACC, and sequential cells containing 1,2,3, etc. for T. Overall, a submission with numerous errors some to be expected, and some that appear to be unexplained or work potentially done too quickly without review. I would very much suggest that you use FAR fewer hard amount in the spreadsheet calculations, and layout more of the assumed values as separate cell entries (the tax rate, the UrRawMatls quantity, the SunkCost, the WACC). If you ever had to go back and change some of these things, it is remote easier to change one cell than try to remember ALL cells that contained the hard number entry.