Case Analysis: USEC Inc Case Solution

On the other hand, the incremental cash flows from the ACP project has also been calculated to compare both of the projects (appendix 3). However, this project also has a great potential for the company and it is also able to add significant value for the company as the project has discounted cash flows ranging from 211 to 71 million almost. However, the incremental cash flows range from 230 to 240 million. Finally, the NPV of the project is almost 2 billion,which indicates that the project can give 2 billion of discounted cash flows after incurring all the expenses. On the other hand, the IRR of the project is almost 12% which is quite low as compared to the Paducah plant but still this project is far more feasible as compared to Paducah because of the higher NPV and real returns. In a nutshell, it could be said that the discounting rate is better since, it has been taken from the WACC and from the literature and books of financial management, it can be seen that WACC is the most appropriate discounting rate.

Note: all the calculations for the revenue and COGS have been calculated by the given capacity while inflation has also been incorporated at 3% per annum.

1         Recommendations

Finally, based on the analysis it can be said that the ACP project is suitable having a lot of profitability potential and the project also has the capability to increase the firm’s overall valueas, the NPV of the project is high and its can add up to 2 billion of discounted cash flows through its overall life cycle or foreseeable future. Furthermore, the IRR of the project is lower than the Paducah’s plant which is 59% but still the ACP project is feasible because of its higher NPV and long term growth potential. As far as the stocks of the company are concerned, it can be said that the project can increase the value of stocks but on a condition that the the company doesn’t issue stock dividends or that it should avoid additional stock issuance.

2         Appendices

2.1        Appendix 1

2.1.1        WACC for USEC

Market Risk Premium 6.00%
RF 5.04%
Beta 1.30
Tax Rate 40%
D/V 56.38%
E/V 43.62%
Rd 8.42%
Re 12.84%
WACC 8.45%

a2.2        Appendix 2

2.2.1        Cash Flows Valuation of Paducah

2006 2007 2008 2009 2010 2011
EBIT           68.32         70.37         72.48         74.65         76.89         79.20
Add Depreciation           30.00         30.00         30.00         30.00         30.00         30.00
Less CAPEX           30.00         30.00         30.00         30.00         30.00         30.00
WC Adjustment              0.58           1.75           1.75           1.75           1.75           1.75
Less Tax                 15               16               17               18               19               19
FCF -180         112.29      112.42      113.75      115.12      116.52      117.96
DCF         103.54         95.58         89.18         83.22         77.67         72.51
NPV $521.71
IRR 59%

2.3.1        Incremental Cash flows of ACP project

Incremental Cash Flows 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
EBIT        197.30           365.79             544.22       560.55       577.36       594.68        612.52        630.90        649.83        669.32        689.40        710.08        731.39        753.33        775.93
Add Depreciation        113.33           113.33             113.33       113.33       113.33       113.33        113.33        113.33        113.33        113.33        113.33        113.33        113.33        113.33        113.33
Less CAPEX                 –                    –                       –                 –                 –                 –                 –                 –                 –                 –                 –                 –                 –                 –                 –
Less Tax        (80.79)        (246.57)           (422.13)     (438.19)     (454.74)     (471.78)     (489.33)     (507.41)     (526.04)     (545.22)     (564.97)     (585.32)     (606.28)     (627.87)     (650.11)

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