Nucor: Case Study

Read the Harvard Business School case Nucor (uploaded)

Read the calculated Excel spreadsheet about Nucor cash flow (uploaded)

Read the Textbook, here is the link:

This is a group assignment; you ONLY need to do part 4. Real Options Analysis.

4. Real Options Analysis   

Consider the following strategic (real) options:
§ The real option value of waiting;
§ The real option value of abandoning the project; and

• § The real option value of growth options (e.g., follow-on plant investments)

You should also take a look at the instruction from part 1 to part 5 (uploaded) to better do part 4. Real Options Analysis.

Group Case Assignment: Nucor

In this assignment, your team will advise Ken Iverson, Nucor CEO, on whether to adopt SMS’s CSP process. In your memo to Iverson, please address the following issues:

1. Cash Flow Analysis
One key question is “By its own investment criterion, should Nucor undertake this investment?” That calculation is what CEO Ken Iverson is interested in at this time. Once you have answered Ken Iverson, the second key question concerns NPV (the criterion taught in your education here).

Using the Excel spreadsheet provided in due time, calculate the cash flow that Nucor could expect if it adopted SMS’s CSP process (see uploaded excel). The relevant spreadsheet is labeled “CF analysis- thin slab”. Most of the critical data are already in the spreadsheet, drawn primarily from Exhibits 12A and 12B. Please adhere to the following assumptions and conventions:

• Do not change any of the figures that have already been provided;
• Use the growth rate provided in the template for the price of steel, not the historical 6.84%
• Assume the entire $280 million construction cost is incurred in 1986; and
• Depreciate the factory equally over 10 years (1989-1998). The spreadsheet includes 12 years, of which two are while the factory is under construction (1987 and 1988). Start in 1989, when the plant comes on line, and assume it loses all value over the next 10 years.

2. Scenario/Sensitivity Analysis

Your recommendation provided in Part 1 depends on a set of assumptions. Identify at least three changes that might occur and calculate how your conclusions for Part 1 change given the change in assumption. Drawing on the case facts, explain why each of these new scenarios are important and whether you consider it likely or not.

3. Strategic Analysis

While SMS’s thin-slab technology would offer operating advantages, the advantages are narrowed by the need to price lower than integrated mills because of the perceived lower quality of mini-mill steel. Nucor’s major competitors include both modernized and un- modernized integrated mills. A leading source indicates that 40% of integrated steel capacity is in modernized plants. Exhibit 12B shows that Nucor would have large cost advantage over un-modernized integrated mills ($225/ton versus $300/ton for Hot Rolled) if it pioneered 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. These concerns lead to the following questions: Based upon the two “CF analysis” Excel worksheets, determine if we should expect the integrated mills to modernize their mills that are currently un- modernized. Why or why not? Assume the integrated mills follow traditional DCF/NPV investment criterion. Given your answer how concerned should Nucor’s top management team be about competing against modernized integrated mills when it opens its first thin- slab technology mill, if it does so?

4. Real Options Analysis 

Consider the following strategic (real) options:
§ The real option value of waiting;
§ The real option value of abandoning the project; and

• § The real option value of growth options (e.g., follow-on plant investments)

5. Conclusion/Recommendation

In light of the (cash-flow, scenario, strategic, and real-options) analysis, should Nucor adopt the CSP process? Why or why not? Please do not just repeat the ideas from above. Consider issues that are not covered in the preceding analyses. For example, are there important stakeholder issues that need to be raised? Explain how your analyses and concerns either reinforce or contradict each other and why you believe that you have correctly identified the most important factors.