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Economics and Finance: Analyse Capital Budgeting Decision

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Economics and Finance: Analyse Capital Budgeting Decision

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  1. Economics and Finance TOLL-FREE NO: +61 879057034 EMAIL: help@assignmentprime.com WHATSAPP NO: +61 450461655 WEBSITE: www.assignmentprime.com ONLINE ASSIGNMENT HELP & WRITING SERVICES IN AUSTRALIA

  2. TABLE OF CONTENTS Introduction .........................................................................................................................................3 Task 1 ...................................................................................................................................................3 Task 2 ...................................................................................................................................................4 Task 3 ...................................................................................................................................................6 Task 4 ...................................................................................................................................................6 Conclusion ...........................................................................................................................................7 References ...........................................................................................................................................8 TOLL-FREE NO: +61 879057034 EMAIL: help@assignmentprime.com WHATSAPP NO: +61 450461655 WEBSITE: www.assignmentprime.com ONLINE ASSIGNMENT HELP & WRITING SERVICES IN AUSTRALIA

  3. INTRODUCTION Any kind of changes in manufacturing technology can have a tremendous impact on steel firms. This study is related with reading the combination of concepts of finance and economics. The major aim of study is to combine the tools of microeconomics and discounted cash flow valuation to analyse a typical capital budgeting decision. For that purpose, US steel industry has been taken into consideration. THIS IS A SAMPLE ASSIGNMENT BUY QUALITY ASSIGNMENT FROM EXPERT WRITERS CONTACT US: TOLL-FREE NO: +61 879057034 EMAIL: help@assignmentprime.com WHATSAPP NO: +61 450461655 WEBSITE: www.assignmentprime.com STEP 1 Economic profits Economic profit = After-tax profits per ton – Capital Charge Capital charge = WACC * Investment per ton Calculation of WAAC = 1 - tax rate = 1 – 40% = 6% Economic profit for Integrated companies After tax return = 10% on initial investment = 10% on $2000 = $200 Capital charge = 6% * $2000 = $120 Economic profit = $(200 – 120) = $80 TOLL-FREE NO: +61 879057034 EMAIL: help@assignmentprime.com WHATSAPP NO: +61 450461655 WEBSITE: www.assignmentprime.com ONLINE ASSIGNMENT HELP & WRITING SERVICES IN AUSTRALIA

  4. Economic profit for Minimill companies After tax return = 10% on initial investment = 10% on $600 = $60 Capital charge = 6% * $600 = $36 Economic profit = $(60 – 36) = $24 Recalculated economic profits Initial investment is replaced by salvage value hence initial investment in this case will be 390. Recalculated Economic profit for Integrated companies After tax return = 10% on initial investment = 10% on $390 = $39 Capital charge = 6% * $390 = $23.40 Economic profit = $(39 – 23.40) = $15.60 Recalculated Economic profit for Minimill companies After tax return = 10% on initial investment = 10% on $2000 = $200 Capital charge = 6% * $200 = $12 Economic profit = $(20 – 12) = $8 The industry is in equilibrium because the quantity supplied is equal to the price of commodities. No competitors are entering in the industry because Nucor steel has made an TOLL-FREE NO: +61 879057034 EMAIL: help@assignmentprime.com WHATSAPP NO: +61 450461655 WEBSITE: www.assignmentprime.com ONLINE ASSIGNMENT HELP & WRITING SERVICES IN AUSTRALIA

  5. agreement according to which no company would be allowed to access the new technology of strip casting before 5 years (Boratav and et.al., 2006). Further, no competitor is leaving the industry because they comforted themselves with the fact that Nucor's new technology is not able to compete with full depreciated existing plants. STEP 2 Price of steel with 5 million additional tons of steel Total production will become = 500000 + 5 million = 5.5 million The new price will be = 500 – 20 = 480 per ton Income statement Income Sales revenue (5.5 miilion * 480) 2640 Expenses Manufacturing costs (5.5 million * 400) 2200 Gross profit 440 million (+) salvage value (200 * 400) 80,000 = 80440 million ROI = (Initial gain – Initial investment) / Initial investment = (2640 – 600) / 600 = 3.4% Recalculated economic profits Initial investment is replaced by salvage value hence initial investment in this case will be 390. Recalculated Economic profit for Integrated companies After tax return = 10% on initial investment = 10% on 390 TOLL-FREE NO: +61 879057034 EMAIL: help@assignmentprime.com WHATSAPP NO: +61 450461655 WEBSITE: www.assignmentprime.com ONLINE ASSIGNMENT HELP & WRITING SERVICES IN AUSTRALIA

  6. = 39 Capital charge = 6% * 390 = 23.4 Economic profit = 39 – 23.4 = 15.6 Recalculated Economic profit for Minimill companies After tax return = 10% on initial investment = 10% on 200 = 20 Capital charge = 6% * 200 = 12 Economic profit = 20 – 12 = 8 THIS IS A SAMPLE ASSIGNMENT BUY QUALITY ASSIGNMENT FROM EXPERT WRITERS CONTACT US: TOLL-FREE NO: +61 879057034 EMAIL: help@assignmentprime.com WHATSAPP NO: +61 450461655 WEBSITE: www.assignmentprime.com The competitors in the steel industry are little concern about the adoption of new technology by Nucor Ltd. After the new price structure, the competitors will not leave from the industry because they will wait for the right opportunities (Cwik and Wieland 2011). This will decrease the prices in industry. It is evident that price is heavily dependent on the quantity supplied. In order to increase the demand, steel firms are forced to lower the prices. The new capacity of Nucor was also blamed for the fall of prices (Evans, 2004). Hence, companies who are not capable of estimating whether prices will increase or decrease may leave the industry. This can decrease the level of competition to some extent. TOLL-FREE NO: +61 879057034 EMAIL: help@assignmentprime.com WHATSAPP NO: +61 450461655 WEBSITE: www.assignmentprime.com ONLINE ASSIGNMENT HELP & WRITING SERVICES IN AUSTRALIA

  7. STEP 3 According to the provided facts, equilibrium will be achieved by producers if salvage value of production is equivalent to the equity cost of capital. As per the data, salvage value is 200 per ton. Capital will be initial amount of investment that has to be invested by producers. Amount of initial investment = 450 * 5 million = 2250 million Cost of capital = 10% return on investment = 2250 * 10% = 225 million Return after tax = 225 million – 40% = 135 million Thus opportunity cost will be 135 million if amount is invested in market. If salvage value of production is equivalent to the opportunity cost then equilibrium will be achieved by the producers of steel. Salvage value per ton = 200$ required amount of opportunity cost = 135 million Units needed to be produced = 135 million / 200$ = 675000 tons Income Sales revenue (675000 * 450) 3037.5 million Expenses Manufacturing costs (675000 * 400) 2700 million Gross profit 337.5 million ROI = (Initial gain – Initial investment) / Initial investment = (3037.5 – 2250 ) / 2250 = .35 TOLL-FREE NO: +61 879057034 EMAIL: help@assignmentprime.com WHATSAPP NO: +61 450461655 WEBSITE: www.assignmentprime.com ONLINE ASSIGNMENT HELP & WRITING SERVICES IN AUSTRALIA

  8. Recalculated economic profits Recalculated Economic profit for Integrated companies After tax return = 10% on 2250 = 225 Capital charge = 6% * 2250 = 135 Economic profit = 225 – 135 = 90 In case if economic profits for leaving are negative, integrated steel producers will leave the industry until it is no longer profitable for them to do so. Particularly they go on leaving till the return on salvage value which equals the opportunity cost of capital (Nattras and Varma, 2014). In case of economic profits becomes negative, nothing will be left for the integrated steel producer to manufacture. There will be absence of profits and this situation can be terrifying for the companies. But as compared to the dismal financial conditions at the time of global financial crisis of 2008- 2009, the steel industry is making healthy and reasonable returns on invested capital (A Model of the Macro-Economy: Aggregate Demand and Supply, n.d.). Operating profits for the world's 10 largest firms are more than $1.5 billion. It was up from the $1.0 billion from the previous year. These strong results have been aroused due to high prices and much lower costs. This is because of a good product mix, average prices rose to $500 a ton. At the existing stage, industry holds a total revenue of $62.5 billion at the current supply of 125 million tons (Guru, 2015). The expansion project is of great value for the company as it provides different types of costs improvement for the company. However, it is not capable of reducing the operating costs but it can lower the essential capital needed. It is expected that a new plant can be constructed with an investment of only $450 per ton without the requirement for primary stands. TOLL-FREE NO: +61 879057034 EMAIL: help@assignmentprime.com WHATSAPP NO: +61 450461655 WEBSITE: www.assignmentprime.com ONLINE ASSIGNMENT HELP & WRITING SERVICES IN AUSTRALIA

  9. STEP 4 Assuming the production in industry will increase on entry of more competitors. The production capacity will increase to 150 million. In this case price will fall to 430 from 450. Income Sales revenue (150 million * 430 ) 64500 million Expenses Manufacturing costs (150 million * 400) 60000 million Gross profit 4500 million ROI = (Initial gain – Initial investment) / Initial investment = (64500 – 2150 ) / 2150 = 29 Recalculated economic profits Recalculated Economic profit for Integrated companies After tax return = 10% on 2150 = 215 Capital charge = 6% * 2150= 129 Economic profit = 215 – 129 = 86 At the end of five years, other firms will have access to the Nucor's technology. Prices will fall till the level it matches with the quantity. Price is highly dependent on the quantity supplied. Steel companies are focusing on lowering the prices in order to increase the demand. For instance, TOLL-FREE NO: +61 879057034 EMAIL: help@assignmentprime.com WHATSAPP NO: +61 450461655 WEBSITE: www.assignmentprime.com ONLINE ASSIGNMENT HELP & WRITING SERVICES IN AUSTRALIA

  10. when the WHX strike stops, the organization increased its shipments by four folds. As a result, the entire industry witnessed a drop in prices (Huttuen, 2004). According to the trade magazines, several reasons were noticed. Minimill Nucor Corp cut prices on cold-rolled and galvanized sheet steel by $25 per ton. According to the industry sources, company was simply following a downward trend in steel prices. Company cuts its prices by $25 per ton. Analysts are blaming new capacity for causing prices to fall. Upstart mini mills had brought a considerable amount of new supply into the domestic market within the past year. More supply is left to be come on line next year. Further, the experts believed that in order to fulfil orders, much of the new supply is being sold at prices that are below the market levels (Boratav and et.al., 2006). Due to this, there is a pressure on integrated mills to decrease the prices and to enforced Nucor Ltd to follow the culture. Nucor steel has recently adopted a new technology named strip casting. It will enhance the production capacity of business. It facilitates a steel function reduction in steel manufacturing production costs. It also brings acceleration in cycle times of production process. The technology is useful in cutting the inventory costs and in reducing the optimal size of a steel plant (Cwik and Wieland, 2011). Strip casting as compared to slab casting transforms the liquid steel into finished flat rolled products. The difference between two technologies is that strip casting converts the liquid steel into a thin gauge finished sheet product in one step. It eliminates the hot rolling and cold rolling steps and the related as well. TOLL-FREE NO: +61 879057034 EMAIL: help@assignmentprime.com WHATSAPP NO: +61 450461655 WEBSITE: www.assignmentprime.com ONLINE ASSIGNMENT HELP & WRITING SERVICES IN AUSTRALIA

  11. CONCLUSION From the above study, it can be concluded that branch of economics is highly connected with the business world. Economics help in taking many business decisions. Strip Casting technology adopted by Nucor Steel provides advantages of step function reduction in steel manufacturing production costs, in increases the production cycle times, decreases inventory costs and reduces optimal size of a steel plant. The stock prices of company has risen after this technology announcement. Their general agreement of holding rights of new technology for five years will be of greater value to their business. Capacity expansion will prove to be a valuable for the company. THIS IS A SAMPLE ASSIGNMENT BUY QUALITY ASSIGNMENT FROM EXPERT WRITERS CONTACT US: TOLL-FREE NO: +61 879057034 EMAIL: help@assignmentprime.com WHATSAPP NO: +61 450461655 WEBSITE: www.assignmentprime.com TOLL-FREE NO: +61 879057034 EMAIL: help@assignmentprime.com WHATSAPP NO: +61 450461655 WEBSITE: www.assignmentprime.com ONLINE ASSIGNMENT HELP & WRITING SERVICES IN AUSTRALIA

  12. References Cwik, T. and Wieland, V., 2011. Keynesian government spending multipliers and spillovers in the euro area. Economic Policy. 26(67). pp. 493-549. A Model of the Macro-Economy: Aggregate Demand and Supply, n.d., [Online]. Available through: < http://www.harpercollege.edu/mhealy/eco212i/lectures/asad/asad.htm>. [Accessed on 10th April 2015]. Boratav and et.al., 2006. Turkey, 1980-2000: Financial Liberalization, Macroeconomic (In)- Stability, And Patterns of Distribution. Oxford University Press. Evans, M., 2004. Macroeconomics for Managers. Blackwell Publishing Ltd. Guru, S., 2015. The IS-LM Curve Model. [Online]. Available through: < <http://www.yourarticlelibrary.com/macro-economics/the-is-lm-curve-model-explained- with- diagram/38026/>. [Accessed on 10th April 2015]. Huttuen, K., 2004. Managing the Demand-Supply Chain. John Wiley & Sons. Nattrass, N. and Varma, G. V., 2014. Macroeconomics Simplified: Understanding Keynesian and Neoclassical Macroeconomic Systems. SAGE Publications India. TOLL-FREE NO: +61 879057034 EMAIL: help@assignmentprime.com WHATSAPP NO: +61 450461655 WEBSITE: www.assignmentprime.com ONLINE ASSIGNMENT HELP & WRITING SERVICES IN AUSTRALIA

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