Essay About Required Rate Of Return And Present Value

Usec Case Solutions
USEC INC. Case StudyWhy is USEC pursuing the ACP?Ans: USEC wanted to stay ahead of its competitors in terms of the technological advancements. The undertaking of ACP by USEC will help USEC improve its efficiencies in producing the fissionable Uranium and at a lower cost than what USEC was producing earlier. Also this would allow the company to target higher profit margins and higher market share by positioning itself as a low-cost producer.What is the net present value (NPV) of the ACP currently implied by the stock market?Ans: [pic 1] where I0 = the initial investment, Ft = the net cash flow in period, i = the required rate of return or hurdle rate; i = 0.1217+0.03 = 0.1517[pic 2] (Based on excel formula (=npv(rate,range of values))3. What is USEC’s weighted-average cost of capital (WACC) in July 2006? Are you comfortable with using this discount rate for the ACP?Ans: WACC = rD (1- Tc)*(D / V) + rE *(E / V) whererD = The required return of the firms Debt financing. This should reflect the CURRENT MARKET rates the firm pays for debt(1-Tc) = The Tax adjustment for interest expense(D/V) = (Debt/Total Value)rE = the firms cost of equity(E/V) = (Equity/Total Value)rE = Risk Free rate + Beta*Market Premium = 5.02% +1.3*5.5% = 12.17%rD = 7.75%Tc = 1 – (Income post tax/Income before Tax) = 1 – 22.3/37.3 = 40%D = $475 Million, E = $930 MillionWACC = 9.63%I am comfortable with using the discount rate (Market Premium). 4. Using the financial data in the case, what is your estimate of the American Centrifuge Project’s NPV? What are the key value drivers in your estimate? Use a sensitivity analysis to illustrate how much the NPV varies for reasonable changes of the key driver inputs.5. Is Mackovjak correct to ignore that the market value of USEC’s inventory of uranium exceeds its book value?