Origin Energy Ltd & Company’s Capital Budgeting Division Case Study Report Writing Accounting Assignment Help

Assignment Task

Case
Your team has just been hired by Origin Energy Ltd to advice the company’s capital budgeting
division. Origin Energy is an Australian publicly listed energy company with headquarters in
Sydney. The company operates 12 power stations in Australia which can jointly generate up
to 6,010 MW of electricity, representing about 13 per cent of the total power generation
capacity in the Australian market. Origin mainly operates coal and gas power plants, besides
a hydroelectric plant and a small solar park. Currently, the company is considering building a
new coal-fired power station. For that purpose, they are looking at a site in Western Australia.
From your team they are seeking advice on the financial feasibility of this project, and also on
the financial risks involved.
Over the last two years, Origin Energy has already spent $100 million on R&D for the
newly proposed power plant. If the company would decide to actually go ahead with the
project, the new power plant, given its projected size, would account for a 20% increase in
assets of the company. In other words, for capital budgeting purposes it would be reasonable
to assume that the initial investment in the plant would be equal to about 20% of the company’s
current gross property, plant and equipment (PPE). The new plant is expected to be in use for
10 years. The economists at Origin are expecting that after that 10-year period, renewable
energy will be cheap enough to outcompete electricity generated by coal plants. At that point
the plant will be retired. The expectation is that at the end of the project, the plant can be sold
at a residual value of only 5% of its original cost. The company would borrow $500 million to
(partly) finance this investment, at an interest rate equal to the average cost of debt of the
company.
The plant is projected to have a capacity of 1,200 MW of electricity per year, which will
increase the yearly revenues of the company by about 23% compared to total revenues in the
financial year ending in June 2020. The revenues of this new project are expected to stay at 
BUSINESS FINANCE
that same level during the first 5 running years of the plant. From then onwards, the company
is projecting that renewables will put increasing pressure on the electricity prices, and this will
have a dampening effect on the revenues of the new plant. The expectation is that after year
5, the revenues of the plant will be gradually decreasing by about 10% per year. 

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