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...