Nucor Memo
INTRODUCTION This memorandum will discuss the economical feasibility of Nucor adopting SMS’s CSP process. It will also provide recommendations on whether to accept or reject this potential investment. These recommendations will be determined based on the examination of a series of cash flow, scenario, and strategic analyses.
CASH FLOW ANALYSIS
Internal Investment Criterion Top management at Nucor Corporation has determined its own internal investment criterion in determining whether to accept or reject a new investment project. Currently, the company judges the potential success of a project by its ability to achieve a 25 percent return on assets after 5 years. This ratio measures how efficiently Nucor’s assets are able to generate revenue. Based off current market growth rate predictions, an investment in the CSP process will result in a return on assets of 29.33 percent. (Exhibit 1) This number exceeds the initial investment qualification by a promising margin of about 4 percent. Therefore, based on the internal criterion, this CSP process is a relatively safe and profitable investment.
Traditional Investment Criteria
Investing in the CSP process meets the current internal investment criterion, however, there are other, more traditional investment criteria that can be analyzed. Net present value of the discounted future cash flows and the internal rate of return are both important attributes that can measure the future success of a project. If Nucor were to invest in this new project, the net present value would be negative 34.02 million dollars. (Exhibit 1) This suggests that the investment should not be undertaken and would result in negative future economic value for the company. Conversely, the internal rate of return associated with the adoption of the CSP process is a positive 13.07 percent. This number is less than the stated discount rate of 15 percent, which is directly reflected in the negative net present value result. Based on these two
CASH FLOW ANALYSIS
Internal Investment Criterion Top management at Nucor Corporation has determined its own internal investment criterion in determining whether to accept or reject a new investment project. Currently, the company judges the potential success of a project by its ability to achieve a 25 percent return on assets after 5 years. This ratio measures how efficiently Nucor’s assets are able to generate revenue. Based off current market growth rate predictions, an investment in the CSP process will result in a return on assets of 29.33 percent. (Exhibit 1) This number exceeds the initial investment qualification by a promising margin of about 4 percent. Therefore, based on the internal criterion, this CSP process is a relatively safe and profitable investment.
Traditional Investment Criteria
Investing in the CSP process meets the current internal investment criterion, however, there are other, more traditional investment criteria that can be analyzed. Net present value of the discounted future cash flows and the internal rate of return are both important attributes that can measure the future success of a project. If Nucor were to invest in this new project, the net present value would be negative 34.02 million dollars. (Exhibit 1) This suggests that the investment should not be undertaken and would result in negative future economic value for the company. Conversely, the internal rate of return associated with the adoption of the CSP process is a positive 13.07 percent. This number is less than the stated discount rate of 15 percent, which is directly reflected in the negative net present value result. Based on these two