Clipboard Font Pau E Nucor case investment analysis (Assignment #4, #10, #11, and Group report) You have been brought in to assess whether Nucor should be the first adopter of a new technology. This requires a $340 million investment in a commercially unproven technology. If successful, Nucor can expand into the flat sheet segment that was previously a segment where only the large integrated steelmakers competed. This assignment requires that you combine qualitative information (e.g., industry and firm insights) with quantitative analysis in Excel (discounted cash flow analysis). The final response requires that you weigh the various pieces of evidence together as a team and conclude with a final recommendation. The Excel cash flow parts contain three worksheets (Nucor thin slab analysis, projected integrated steelmaker modernize, and projected integrated steelmaker unmodernized spreadsheets). You are being asked to apply four complimentary types of analysis to the Nucor case: background analysis (brief industry and internal), cash flow analysis (a template is provided), scenario analysis (1.e., changes within the model), and strategic analysis (ie, considerations outside the model, such as competitor behavior). Assignment #4 Nucor I (25 points) 1. Background Analysis Industry: or the three groups of steelmakers, what are some of the differences between integrated steelmakers and minimill steelmakers? Nucor: What are some of the core competencies of Nucor? One way to think about this is to consider what its most distinguishing value chain (ie, primary and support) activities are that have been difficult for others to imitate. 2. Cash Flow Analysis Use the "CF analysis-thin slab" Excel spreadsheet provided as a template to calculate the cash flows Nucor could expect if it adopted SMS's CSP process Most of the critical data is already in the spreadsheet, drawn primarily from Exhibits 12A and 12B. Please adhere to 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 $280 million construction cost is incurred in 1986 Depreciate the factory equally over 10 years (1989-1998). The spreadsheet says 12 years, which includes the two years the factory is aragrapn Styles under construction (1987, 1988). I want you to start in 1989, when the plant comes online, and assume it loses all value over the next 10 years. Note that in applying its investment criterion, Nucor ignored start-up expenses and working capital costs. Thus, in figuring the assets of the minimill in 1989 or later, those expenses need to be added to the asset base before calculating ROA. a. By Nucor's own investment criterion (i.e., 25% return on assets at five years), what will CEO Ken Iverson think about this investment? b. As a consultant using more traditional investment criteria (such as NPV or IRR), what do you think about this investment from this part of the analysis? Assignment #10 Nucor II (25 points). Scenario analysis Your analysis in assignment #4 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 (ie, a sensitivity analysis), notice how the NPV, IRR, and Nucor ROA values change. For this part of the analysis, create one scenario by changing to or more of the central assumptions. Calculate how your new scenario changes the results for Part 1 Drawing on the case, explain why your scenario is important and whether you consider it likely or not. Assignment #11 Nucor III (25 points). 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 (1.e., the big competitors) because of the perceived lower quality of minintill steel. Nucor's competitors include integrated steelmakers with modernized and umodernized 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 (5225/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 a. 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 umodemized Why or why not? Assume they follow traditional investment criterion (NPV or IRR) rather than Nucor's ROA. b. 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 so2 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 modemized plant has already been fully depreciated Clipboard Font Pau E Nucor case investment analysis (Assignment #4, #10, #11, and Group report) You have been brought in to assess whether Nucor should be the first adopter of a new technology. This requires a $340 million investment in a commercially unproven technology. If successful, Nucor can expand into the flat sheet segment that was previously a segment where only the large integrated steelmakers competed. This assignment requires that you combine qualitative information (e.g., industry and firm insights) with quantitative analysis in Excel (discounted cash flow analysis). The final response requires that you weigh the various pieces of evidence together as a team and conclude with a final recommendation. The Excel cash flow parts contain three worksheets (Nucor thin slab analysis, projected integrated steelmaker modernize, and projected integrated steelmaker unmodernized spreadsheets). You are being asked to apply four complimentary types of analysis to the Nucor case: background analysis (brief industry and internal), cash flow analysis (a template is provided), scenario analysis (1.e., changes within the model), and strategic analysis (ie, considerations outside the model, such as competitor behavior). Assignment #4 Nucor I (25 points) 1. Background Analysis Industry: or the three groups of steelmakers, what are some of the differences between integrated steelmakers and minimill steelmakers? Nucor: What are some of the core competencies of Nucor? One way to think about this is to consider what its most distinguishing value chain (ie, primary and support) activities are that have been difficult for others to imitate. 2. Cash Flow Analysis Use the "CF analysis-thin slab" Excel spreadsheet provided as a template to calculate the cash flows Nucor could expect if it adopted SMS's CSP process Most of the critical data is already in the spreadsheet, drawn primarily from Exhibits 12A and 12B. Please adhere to 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 $280 million construction cost is incurred in 1986 Depreciate the factory equally over 10 years (1989-1998). The spreadsheet says 12 years, which includes the two years the factory is aragrapn Styles under construction (1987, 1988). I want you to start in 1989, when the plant comes online, and assume it loses all value over the next 10 years. Note that in applying its investment criterion, Nucor ignored start-up expenses and working capital costs. Thus, in figuring the assets of the minimill in 1989 or later, those expenses need to be added to the asset base before calculating ROA. a. By Nucor's own investment criterion (i.e., 25% return on assets at five years), what will CEO Ken Iverson think about this investment? b. As a consultant using more traditional investment criteria (such as NPV or IRR), what do you think about this investment from this part of the analysis? Assignment #10 Nucor II (25 points). Scenario analysis Your analysis in assignment #4 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 (ie, a sensitivity analysis), notice how the NPV, IRR, and Nucor ROA values change. For this part of the analysis, create one scenario by changing to or more of the central assumptions. Calculate how your new scenario changes the results for Part 1 Drawing on the case, explain why your scenario is important and whether you consider it likely or not. Assignment #11 Nucor III (25 points). 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 (1.e., the big competitors) because of the perceived lower quality of minintill steel. Nucor's competitors include integrated steelmakers with modernized and umodernized 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 (5225/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 a. 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 umodemized Why or why not? Assume they follow traditional investment criterion (NPV or IRR) rather than Nucor's ROA. b. 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 so2 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 modemized plant has already been fully depreciated