Description

RMIT University

CORPORATE FINANCE

Assessment Task 2 – Business Project Report & Presentation

 Type: Group Assessment

Weight: 40% of final grade

Due date: Report, Excel spreadsheet, presentation slides and video – due Friday 4th October 2024 (Week 10), 11:59 PM, Melbourne time

Task: This assignment will require your team to provide a report and give a presentation to the management of your company, to help them decide on undertaking a new project.

Word count: A maximum of 2,000 words for the report. A maximum of 10 minutes for the recorded presentation.

 Case

Your team has been hired by Origin Energy Ltd to advise the company’s capital budgeting division on a proposed new project.

Origin Energy Limited is an Australia-based integrated energy company. The principal activity of the Company is the operation of energy businesses, including exploration and production of natural gas, electricity generation, wholesale and retail sale of electricity and gas, and sale of liquefied natural gas. The Company’s segments include Energy Markets, Share of Octopus Energy, Integrated Gas, and Corporate. The Energy Markets segment is engaged in energy retailing and wholesaling, power generation, and liquefied petroleum gas (LPG) operations predominantly in Australia. The Share of Octopus Energy segment includes the Company’s investment in Octopus Energy Group Limited. The Integrated Gas segment is focused on the investment in Australia Pacific LNG (APLNG), and exploration interests in the Cooper[1]Eromanga, and interest in Hunter Valley Hydrogen Hub on Kooragang Island. The Corporate segment provides various business development and support activities.

In line with its commitment to supporting Australia’s transition to a low-carbon economy, Origin Energy is considering the development of a new wind farm in South Australia. The proposed wind farm is projected to significantly contribute to the company’s renewable energy portfolio and aligns with Origin Energy’s broader goal of increasing its renewable energy capacity while transitioning away from fossil fuel-based power generation. The wind farm will generate clean electricity and help reduce the company’s reliance on fossil fuels.

Over the last two years, Origin Energy has already spent $2 million on research and development (R&D) for the proposed wind farm. If the company decides to proceed with the project, it will require an initial capital expenditure equal to 15% of the company’s net property, plant, and equipment (PPE) as per the financial year ended 30 June 2023. To maintain the plant’s operational efficiency and competitiveness, Origin Energy plans to make a significant additional investment at the end of year 7. This investment, expected to be 15% of the initial capital expenditure, will focus on upgrading key assets, incorporating technological advancements, and ensuring the plant continues to meet industry standards. Depreciation of both the initial wind farm assets and subsequent investments will be calculated on a straight[1]line basis over a 20-year lifespan.

The wind farm is expected to be operational for 20 years. At the end of this period, the project will conclude, and the company will evaluate the feasibility of developing a new wind farm based on the latest technological advancements and market conditions. The residual value of the wind farm is expected to be 10% of its original cost at the conclusion of the project. To finance this investment, the company plans to borrow $400 million, with the interest rate aligned with the company’s average cost of debt.

The new wind farm is projected to increase the yearly revenues of the company by about 7% compared to total revenues in the financial year ending in June 2023. The revenues from this new project are expected to remain steady at that same level during the first 5 years of operation. However, beyond year 5, the company anticipates increasing pressure from renewable energy sources on electricity prices, and this will have a dampening effect on the revenues of the project. The expectation is that the revenues of the project will experience a decline of 6% per year from year 6 to year 10, and a decline of 10% per year from year 11 to year 20.

Your team will have to determine the rest of the cash flows associated with this proposed project. The CFO of the company has indicated that it would be reasonable to expect that the operating costs of the new plant will be of similar proportion relative to the revenues as Origin’s other plants in the financial year ending in June 2023. The project will require additional net working capital (NWC) of about 5% of the first-year revenues of the project. This investment in NWC will be made at the beginning of the project. In evaluating the feasibility of the project, the company’s management is uncertain whether to charge the $2 million spent on R&D to the new project.

Here are some additional tips to guide your analyses:

1) Obtain Origin Energy’ (ticker code: ORG) financial statements. Download the annual income statement, balance sheet and cash flow statement for the financial year ended 30 June 2023. One place to find the company’s financial statements is on investing.com, find the company and click on Financials. Make sure to get the annual financial statements, instead of the quarterly.

2) You are now ready to determine the free cash flows of the new project. Set up a timeline in a spreadsheet, which allows you to compute the free cash flows of the project on a yearly basis, in a separate column for each year of the project life. Be sure to make outflows negative and inflows positive.

2023. To estimate the annual operating costs of the project, assume, as the CFO indicated, that the project’s profitability, the ratio of Revenue / Operating costs (Operating costs may also be labelled as “Costs of Revenue”) will be similar to the company’s existing projects in 2023.
2024. Determine the company’s effective tax rate by dividing its income taxes by its income before tax in 2023.

3) Assume that the project’s cost of capital will be equal to 11%.

Report

The company is asking your team for advice on the financial feasibility of this project. The results of your analyses will have to be presented as a business report to the company’s executive management team. The executive management team will expect much more from the report, than just a table(s) with the NPV and IRR results. The report should have a maximum of 2,000 words, excluding appendices. Remember, members of the executive management team often do not have a finance background.

• The report should provide clear advice on whether the company should go ahead with the project.
• The advice of your team should be (partly) based on your estimations of the NPV and the IRR of the proposed project. Remember, members of the executive management team often do not have a finance background, so your results will have to be supported by clear tables which show the calculation of the free cash flows; clear explanations of how the free cash flows were computed, what issues the capital budgeting team had to deal with, and what choices were made in these computations, and why.
• The estimated figures on the proposed project, for example the yearly revenues that the project will generate in the future, are of course just estimations – not certainties. If the company decides to go ahead with the project, these values may turn out to be different than expected. The revenues may be higher or lower than projected for example, or the cost of capital of the company could be higher or lower in the future than it currently is. Therefore, your team needs to perform some additional analyses. Firstly, present a NPV profile, which illustrates the NPV of the project at various values for the cost of capital. Secondly, recompute what the NPV and the IRR of the project would be if, for example, the revenues of the project turn out to be 25% lower than projected. Your team is encouraged to provide additional ‘sensitivity’ analyses of this sort.
• A summary of recent insights in the energy market from reputable and credible business finance articles (including references).
• A discussion on potential risks involved with this project.
• And more… use your imagination, what does the management team need to know about this project? Professional presentation of a visually appealing report is essential for business communication. Business reports are structured with:
• an executive summary
• table of contents
• informative headings and sub-headings
• numbered sections
• page numbering
• professionally designed and labelled graphs and tables
• a reference list.

Recorded Group Presentation

Your team is also required to make a recorded group presentation to present the results of your analyses to the company’s executive management team. Your team has 10 minutes (maximum) for the presentation. The presenter needs to show your face while presenting. All team members must participate in the presentation. Recording the presentation can be done using Microsoft PowerPoint or Microsoft Teams and must be exported in a video format (See an example on how to use Microsoft PowerPoint).

The presentation needs to be supported using a slide deck. The presentation should include (at a minimum!) the following information:

(1) An introduction of each of the team members and their financial expertise.

(2) A brief discussion of the newly proposed project. Which product/service is being developed?

(3) A demonstration of the expected yearly cash flows of the project. Remember, members of the senior management team often do not have a finance background, so you will have to present clear tables which show the calculation of the free cash flows, and clearly explain how the free cash flows were computed. You basically have to explain to them in your presentation how capital budgeting works.

(4) A demonstration of the NPV, the IRR, and other additional analyses of the proposed project. Again, you will need to explain to the executive team what exactly these capital budgeting metrics are, how they are computed and why they are helpful for making investment decisions. Include critical notes with each of the decision rules if you see fit.

(5) Advise on whether or not the company should go ahead with the proposed project. Provide clear reasoning for your advice.

 

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