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. 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. Secondly, Mackovjak had been offered a job as an analyst during the summer period of 2006 upon completion of the first year of MBA program. For Mackovjak to recommend the USEC's stocks, then they had to be worth the shot, and the ACP project was a sure way to see to this.
ACP can best be described as a transitional project that USEC was pursuing to be ahead of its competitors in technology. Therefore, the best discount rate that should be used to evaluate the project should be minimal, if not zero. 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 key value of ACP is that it is ahead of its time and thus, puts the company 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.
I would recommend that Rivanna Capital should not take any stand on ACP. ACP is a new project, and the best predictor of the value of a new investment is time. Mackovjak would try his level best to give a correct assessment of ACP, based on the projects expected returns and intuition as opposed to fact and figures on ACPs performance. Therefore, Mackovjaks assessment can best be termed as an accurate guess which Rivanna should not rely on to make a position in the stock of USEC.
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 securitys 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.
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