1) Obtain Origin’s (ticker code: ORG) financial statements. Download the annual income statements, balance sheet and cash flow statements for the last four fiscal years. One place to find Origin’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.
a. 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 Origin’s existing business.
b. Determine Origin’s effective tax rate by dividing its paid income taxes in previous years by the income before tax in the same years. It might be good to take the average effective tax rate of FY 2019 and 2020, due to the negative net income in FY 2021.
3) Assume that the cost of capital of the new plant will be equal to the company’s weighed average cost of capital (WACC). See here for information on the company’s bonds.
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