Nucor_team8_V2 - BA 590: The economics of organization...

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BA 590: The economics of organization Nucor case assignment Team 8 Fang Liu Xin Luo Ozlem Tokur Xi Wang Bonnie Yu Introduction (a) Cash flow analysis
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Team 8 Assumptions: 1. The depreciation of Thin-slab project is straight-line over 10 years; 2. The annual growth rate of price of steel is 4%; 3. The annual growth rate of operating costs is 4%; 4. The tax rate is 35%; 5. Discount rate is 15%. Cash flow analysis Thin-slab Modernized Integrated mill Unmodernized Integrated mill ? HR CR HR CR HR CR Break-even point (million tons) 0.230 0.176 1.229 0.805 1.386 0.860 NPV -23.05 -134.12 542.19 IRR 13.35% 14% N/A ROA at Year 5 32.04% 16.42% N/A (Refer to appendix: table 1 to table 4) According to the cash flow analysis above, we think Nucor should choose the Thin-slab project. The reasons are as follows: Firstly, the net present value of thin-slab is higher than modernized project. Furthermore, the thin-slab project achieves a ROA of 32.04% the second year after set-up, which is more than 25% threshold. However, the modernized project only achieves a ROA of 16.42% at that year. In addition, the break-even point of thin-slab is much lower than that of modernized project. If Nucor initiates the thin-slab project, it can achieve more flexibility in operating. (b) Scenario analysis Defer 3 years 2
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Team 8 Assumptions: 1. The depreciation of Thin-slab project is straight-line over 10 years; 2. The annual growth rate of price of steel is 4% for the first 3 years; 3. The annual growth rate of operating costs is 4% for the first 3 years; 4. The tax rate is 35%; 5. Discount rate is 15%; 6. Nucor defer 3 year to make sure that the CSP's application condition is the main and right decision, compared with other casting technology. 7. After 3 year, with the increased investment, the annual growth rate of shipments is 5%; 8. After 3 year, with the increased competition, the annual growth rate of price of steel is 3%; 9. After 3 year, with the increased competition, the annual growth rate of operating costs (mainly due to scrap price) is 5%; 10. For the first 3 years, Nucor could maintain the business condition and profit condition under unmodernized, using the unused capital expenditure; 11. The capital expenditure, start-up cost and working capital would not be changed due to the deferral. Abandon Assumptions: 1. The depreciation of Thin-slab project is straight-line over 10 years; 2. The annual growth rate of price of steel is 4% for the first 3 years; 3. The annual growth rate of operating costs is 4% for the first 3 years; 4. The tax rate is 35%; 5. Discount rate is 15%; 6. Nucor defer 3 year to make sure that the CSP's application condition is not the most right decision, compared with other casting technology; 7. After 3 year, the annual growth rate of shipments is the same as previous
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Nucor_team8_V2 - BA 590: The economics of organization...

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