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Product Overview

This case is designed to present students with the challenges of formulating a discounted-cash-flow (DCF) analysis for a strategically important capital-investment decision. Analytically, the problem is representative of most corporate investment decisions, but it is particularly interesting because of the massive size of the American Centrifuge Project and the potential of the project to significantly affect the stock price. Students must determine the relevant cash flows, paying close attention to the treatment of input costs, selling prices, timing of investment outlays, depreciation, and inflation. An important input is the appropriate cost of uranium, which some students argue should be included at book value, while others argue that market value should be used. Although the primary objective of the case is to focus on the estimation of cash flows, students are provided with a straightforward set of inputs to estimate USEC's weighted average cost of capital. The case is designed for students who are learning, or need a refresher on, DCF analysis. Because of the basic issues covered, the case works well with undergraduate, MBA, and executive-education audiences. The case also affords the opportunity to explore a variety of issues related to capital-investment analysis, including relevant costs, incremental analysis, cost of capital, and sensitivity analysis. The case is an excellent example of the value of a firm as the value of assets in place plus the net present value of future growth opportunities.

Learning Objectives

• The basics of incremental-cash-flow analysis: identifying the cash flows relevant to a capital-investment decision • The construction of a side-by-side DCF analysis for a replacement decision • An illustration that the value of a firm equals the value of assets in place plus NPV (future growth opportunities) • Calculation of weighted average cost of capital • The importance of sensitivity analysis to a capital-investment decision