STRATEGIC FINANCIAL MANAGEMENT

Strategic Financial Management



Scott Nuclear Power Company

Introduction

Finance management is important as it is related to profit maximization, debt management, Overhead Payment and secure investment. These are the main elements that maneuver company in the direction of growth and for achieving their goals i.e. earnings and gaining investor's confident. It is essential to keep track on this area as it is correlated with business survival and its development. The focus of this paper would be on Scott Nuclear Power Company that has received initial planning consent for an Advanced Boiling Water Reactor. Moreover, using capital budgeting techniques, decision will be made whether this project is beneficial in future or not.

Overview of the company

The Scott Nuclear Power Company (SNPC) is a company which has been involved in electricity generation. Recently they received initial planning consent for an Advanced Boiling Water Reactor.

The following is the project proposal summary:

Cost

$ 2 billion

Tenure

3 years

Future Cost Increases

Year End

2013

2014

2015

Construction costs

$ 600

$ 1200

$ 200

Generation of electricity

$ 195 million per annum

Operating life

30 years

Decommissioning costs

$ 600

Nominal GDP growth

5%

Nominal cost of capital

12% pa

From the above data, we will evaluate the feasibility of the project.

i. An estimate of the net present value for this project as at the commencement of construction in 2013

In order to estimate Net present value of the project, 30 years Annuity factor, growth rate of 5% and discount rate is 12%. The following formula will be used:

An =

An =

An = $ 12.83

Year/Type

Cash Flows

DF (12%)

Present value ($m)

2012 Construction

- $ 600

1.12^-1

0.89

- $ 535.71

2013 Construction

- $ 1200

1.12^-2

0.80

- $ 956.63

2014 Construction

- $ 200

1.12^-3

0.71

- $ 142.36

2015 - 2044 Annual operating surplus

+ $ 195

12.83*1.12^-3

9.13

$ 1, 780.77

2044 Decommissioning

- $ 600

1.05^33*1.1^-33

0.22

- $ 129.25

 NPV

 

 

 

$ 16.81

As we know that Net present value has been give more consideration while evaluating the projects due to its reliability and due to three main reasons that are Lost in Interest, risk associated with the investment and lastly the inflation rate (Brigham, Houston, 2012, p. 350).

Net present value according to finance theory refers to present value of future cash flows (Brigham, Ehrhardt, 2012, p. 385).

According to the Rules of Net present value:

When project indicates a positive figure for Net present value than the project should be accepted.

When project indicates a negative figure for Net present value than the project should be rejected.

In case of Mutually Exclusive Projects than consideration is given to project which has higher Net present value.

Since, Net present value for Advanced Boiling Water Reactor is $ 16.81 for 1 January 2012 that further favours project and add value to the business, is this project is implemented (Brigham, Ehrhardt, 2012, p. 385).

ii. A discussion of the principal uncertainties associated with this project

When a person or company decides for an investment, their motive is to earn profit i.e. more than their cost of capital. At this point, the factor of risk or uncertain always exist. Considering the Advanced Boiling Water Reactor, the following are uncertainties categorized in to:

Capital Expenditure level, project timing over the investment project ...