Dr. Doina Chichernea
The University of Toledo
APRIL 21, 2011
USEC is the world’s leading supplier of enriched Uranium to nuclear power plants. Due to the expiration of long term energy cost savings contracts, USEC is examining the possibility of taking on a new project called the American Centrifuge Project. This project will utilize a different process for Uranium enrichment, which is the core business process of USEC. The new technology process uses much less energy, which will reduce manufacturing costs and keep USEC on the leading edge of technology in the enrichment market space. As with any major energy industry project, the ACP project …show more content…
Weighted Average Cost of Capital
To calculate the weighted average cost of capital, we first calculated the market value of debt and equity. The case exhibits provided the necessary data to calculate the market value of debt and equity. The weight of debt and equity were calculated to be around 32 and 68 percent respectively. Appendix will provide the detailed steps we used to calculate the WACC, individual cash flows for Paducah and ACP and the incremental cash flows.
A risk free rate of 5.19%, a Beta of 1.3, and a market risk premium of 6% were used to calculate the cost of equity using CAPM. For cost of debt, we used the given 9.04%.
We came up with the after tax WACC of 10.57%
Analysis and Recommendation
We are comfortable in using the WACC as the discount rate for cash flow calculation. NPV calculation using the WACC as the discount rate will provide us some idea about whether this project is at least worth or not