Your cash flow analysis relies on a set of assumptions.
2. Sensitive analysis
Your cash flow analysis relies on a set of assumptions. With the base model available, we could now consider multiple scenarios based on a different set of assumptions. If you change one assumption at a time (i.e., a sensitivity analysis), notice how the NPV, IRR, and Nucor ROA values change. For this part of the analysis, create three scenarios by changing one of the central assumptions for each scenario. Calculate how your new scenario changes the results for Part 1. You should provide explain why your scenario is important. In the end, answer whether the original cash flow analysis is sensitive or robust to the changes in the assumptions.
3. Competitive analysis
While SMS’s thin-slab technology would offer operating advantages for Nucor (a minimill firm), these advantages are narrowed significantly by the need for Nucor to price its thin-slab products lower than thin-slab products from the integrated mills (i.e., the big competitors) because of the perceived lower quality of minimill steel.
Nucor’s competitors include integrated steelmakers with modernized and unmodernized integrated mills. While estimates vary, let’s assume that 40% of integrated steel capacity was in modernized plants. Exhibit 12B shows that Nucor would have a large cost advantage over unmodernized integrated mills ($225/ton versus $300/ton for Hot Rolled) if it adopted SMS’s technology. However, the cost advantage over modernized mills is much lower. In fact, Nucor might find it difficult to compete head-on with a modern integrated mill that decided to price very aggressively.
This leads to two questions for you to answer.
Based on the “CF analysis-Modernize” and “CF analysis-Unmodernized” Excel worksheets, determine if we should expect the integrated steelmakers to modernize mills that are currently unmodernized. Why or why not? Assume they follow traditional investment criterion (NPV or IRR) rather than Nucor’s ROA.
Given your answer to the previous question, how concerned should Nucor be about competing against integrated steelmakers with modernized mills when it opens its first thin-slab technology mill, if it does so?
Please observe the following assumptions and conventions.
Don’t change any of the figures I have input.
Use 6.45% as the growth rate for the price of steel, not the historical 6.84%
Assume the entire construction cost of modernizing a mill is incurred in 1986
Depreciate the modernization evenly over 25 years, starting when it comes online in 1987. Assume the unmodernized plant has already been fully depreciated.
4. Real options analysis
Consider the following strategic (real) options situations:
Is there benefit to waiting 1-2 years?
Is there benefit to starting the project but then later abandoning the project? In other words, how much of the $340 million investment is redeployable for other uses if we decide to later stop the project?
How should we think about possible growth options (i.e., consideration of plants beyond the first one)? Keep in mind that Ken would ultimately like to build 3-4 plants.
5. Final recommendation
In light of all of the (cash-flow, scenario, competitive, and real options) analysis above, should Nucor adopt the CSP process? Why or why not? Do not just repeat the three conclusions from above. Consider issues that are not covered in the preceding analyses.