Nucor Financial Analysis
Luis Gonzales Lisa Green Amanda Saylor MGM399-Dr. Riley Nucor Case CEO Iverson of Nucor has a decision that could present an opportunity into the flat-rolled niche.
Most of the integrated steelmakers have been lately concentrated in this sector but it presents challenges to enter as will be discussed. As a leader in non-flat products Nucor wants to enter a market that lately has been prohibitive because of cost and volume requirements. A company named SMS has a new technology Compact Strip Production (CSP) that presents an opportunity to possibly market a cheaper alternative on a smaller scale.
We will look at the decision whether or not Mr. Iverson will invest in a new thin-slab mini mill using this new process.
The cash flow analysis by which Nucor adheres to has relatively few requirements to undertake a new investment. The first must be that new plants are supposed to achieve 25% ROA within five years of start-up. We look at this by examining the parameters of cost and revenues and finding the net income given the 5th year and dividing by the total assets minus any depreciation.
As it stands ROA would be give a return of 22. 34% as the excel file shows. This would indicate how efficient management is using assets to generate earnings.
Whether by design or industry comparison, this result does not meet the requirements that Nucor would approve. The next part of the cash flow analysis deals with Net Present Value (NPV). Nucor and any company that seeks to project if an investment is worthwhile to pursue must understand if the cash flows are in excess of the cost of capital.
There are several different assumptions that are given to understand NPV for this project. The excel sheet “CF analysis-thin slab” shows in detail that cash flows are delayed due to plant construction and start-up costs. When the negative and positive cash flows are calculated by the discount rate of 15% there appears a NPV of -$51. 32. This shows that the project does not present a likelihood of meeting capital requirements. This is the last of the requirements that Nucor needs to be positive because it correlates with profitability.
Scenario analysis will be looked at to understand if that the conditions assumed for the project can change the outcome of the decision.
The conclusion of cash flow analysis could be projected differently if the parameters are changed. These are 3 scenarios that are presented by understanding different economic and competitive conditions: * Growth Optimist. The growth assumptions are presumed to be in line with historical growth rates for steel prices. * Cost Cutters. An efficient environment that finds CSP technology accepted in the industry and used more affordably. Market Woes.
Interest rates for government debt declines in uncertain terms affecting all businesses handcuffed to borrowing costs. By looking at these scenarios we can also quantify the changes might have with the projections in the excel sheet for thin slabs. Doing what-if calculations can also look at some of these scenarios by changing the assumptions given. In the first scenario we understand the price growth rate is less than historical rates but that is pragmatic and causes revenue to be less than what can be actualized.
If the quality standards can continue to improve with CSP process then I can see where this scenario holding true. The second scenario is important because it can improve the profitability by using cost controls more efficiently in thin-slab production.
I can see this being less likely as the CSP process is so new and cannot be understood until it’s widespread use in the industry. Finally, the third scenario will be look at the market changes affecting the cost of capital. This is the most likely to be affected in the immediate term.
Although, this assumption would also assume that if borrowing costs can be projected to be lower then the project can be delayed until a more favorable environment. Some of the changes are analyzed in the scenarios analysis in the excel sheet so that CEO Iverson might make a better decision based on their effect on his criterion requirements. Only under the first scenario do we see that this positive change on NPV and ROA would result in an outcome that would ensure that the project would be approved.
The other scenarios would have mixed results and would only reinforce the original projections as they are assumed now.
