FIN203: Corporate Finance- Rio Tinto - Corporate Finance Assignment Help

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Corporate Finance Assignment Help

TASK Rio Tinto is considering opening a new iron mine today in 2014 (time 0). The mine will have a life of 5 years, after which it will be closed. The new mine requires the purchase of new mining equipment costing $400,000,000 today. The useful life of the mining equipment is 5 years and will be depreciated to 0 over its five-year life. At the end of 5 years it has an estimated sale value of $157,500,000. The new mine will be developed on a site which already has an existing copper mine. The original mine is currently being rented to another company under a lease agreement that has 5 years to run and provides for an annual rental of $500,000. Under the lease agreement, Rio Tinto can cancel the lease by paying the lessee equal to 1 year’s rental payment at the end of year 1. Rio Tinto plans to keep this mine, cancel the lease and use it in the development and operation of the new iron ore mine. It is expected that the new mine will require exploration expenses of $300,000 at the end of year 2 of the mine’s operations. Additions to current assets (working capital) will require $225,000,000 at the commencement of the project and are assumed to be fully recoverable at the end of the fifth year. The new mine is expected to generate revenues as follows and operating expenses are 40% of revenues every year due to high transportation costs. (Assume all cash flows occur at the end of the year) Year 1 $200,000,000 Year 2 $250,000,000 Year 3 $325,000,000 Year 4 $300,000,000 Year 5 $450,000,000 The cost of capital is 10% and the tax rate is 30%. a) What are the Free Cash Flows for the new mine? Use an excel spreadsheet to calculate. b) What is the NPV for the new mine? What is the IRR (internal rate of return)? c) Based on your analysis in a) and b) should the project be accepted? Justify your answer with reference to theory.