USEC company background
The USEC Inc. was the leading supplier of Uranium globally. It was founded in 1990 by the U.S. government, and it had its headquarters in Bethesda, Maryland. The publicly traded company also offered consultancy to the Department of Energy.
Executive summary project
About the USEC Inc., the American Centrifuge Project (ACP) is a project that would give the company a competitive advantage. Therefore, the primary reason that USEC is pursuing this project although it is clearly going to require massive capital expenditure is that it would significantly raise the competitive position of the company. Other than that, only the beginning phase of the project would require significant amounts of capital, and as soon as the project picks up, the expenditure is bound to reduce, and the company gets to retain the competitive advantages associated with the project. From Exhibit 1, the company can easily pursue the ACP project since they have been registering a steady improvement in net profits. From a loss of 4 million dollars in 2002 to a profit of 23 million in 2005, the company is steady enough to fund a new project.
How valuable is American Centrifuge Project to USEC?
ACP can best be described as a transitional project that USEC was pursuing to be ahead of its competitors in technology. Based on the fact that ACP is a new project, a pilot study should be conducted to evaluate the viability and profitability of the same. Actual figures should be used to ascertain this before USEC can decide to factor in discounts. At the beginning of the project 0% percent discount should be allowed in this evaluation so that the company can get a clear stand of the project. In accounting, evaluation of a new project should have zero deductions so that the actual value of the project can be assessed. This accounting principle vouches for giving allowance for minimal profits and maximum losses, the same should apply in evaluating a new project. The major advantage of ACP is that it is a future-oriented project and therefore, if the company pursues it, it puts USEC a step ahead of its competitors although it comes with an added expense. My recommendation to the company is that it should pursue this project since change is inevitable and sooner or later, the other companies will have to catch up. The sensitivity of this recommendation is that ACP, being a new project may fail to work and it will be a big blow to the USEC Inc. regarding the vast sums of money invested in the same.
Should Rivanna take a stand on American Centrifuge Project?
I would recommend that Rivanna Capital should not take any stand on ACP. The primary reasons why Rivanna should not take a stand on ACP is because the market value of ACP as an investment has not yet been established. In this case the best predictor of the value of a new investment is time. If Rivanna was to take a long stand on the project and it turned out to be a value-destroying investment, it would mean that the market value of the stock was overvalued; making it a wrong move. Similarly, if Rivanna took a short stand on ACP and it turned out to be a value-creating investment, it would mean that the market value of the stock was undervalued and they would be missing on possible profit. Therefore, it would be best if Rivanna gave ACP sometime before ascertaining whether to take a long or short stand. In Exhibit 5, USEC stick has been gaining significantly and taking a stand whether short term or long term might have a negative impact on the value of stocks and this is too much a risk to take. Mackovjak would try his level best to give a correct assessment of ACP, based on the project’s expected returns and intuition as opposed to fact and figures on ACP’s performance. Therefore, Mackovjak’s assessment can best be termed as an accurate guess which Rivanna should not rely on to make a position in the stock of USEC.
Short selling and the reasons behind it
Selling a borrowed security is known as short selling. The reason why investors would engage in such a transaction is the single belief that a drop in the security’s price is inevitable and when this happens, they stand to benefit when the same stock is bought back at a lower price. A significant part of short-selling is short covering which involves the buying back of borrowed securities to close an open short position. Short selling is a risky way to appropriate a depreciating stock. It includes five steps namely borrow, sell, wait, buy back, and return.