Can anyone help me to calculate the WACC of OPTION 1 , With the help of the given information and given data, you need to work out the individual costs1 and value of each of the sources of capital and apply that to the WACC equation to work out the overall weighted cost.
Rio Tinto is considering a construction proposal to expand the Western Turner Syncline Phase 2 mine. The additional iron ore will feed into Rio's production of the "Pilbara Blend" and maintain its iron ore production capacity for raw materials used to make steel. However in order to proceed with this expansion, Rio Tinto must construct a new "Crusher", an ammonium nitrate and fuel oil (ANFO) facility, and a 13-kilometre conveyor to link the greater Tom Price site's two mines. Rio Tinto has undertaken a feasibility study costing $1.6 million to explore their options. The required tax rate for both options can be found in the details under the balance sheet. [For simplicity we will assume a project life time of 3 years - that is Year 0, Year 1 Year 2 and Year 31Option 1: Building a *Crusher* and 13-Kilometre Conveyor The construction and installation of a new "Crusher" and 13-kilometre conveyor will cost $24 million. In addition, an ANFO facility will also need to be constructed at a cost $8.2 million. This facility will need to be supplied with slurry pumps, mixed flotation systems and other equipment at a total cost of $7 million. Rio Tinto's reserve fleet of autonomous Caterpillar Haulage trucks will meet the needs for this project, however until recently, the fleet has been earning a rental income of $1,030,000 per year. The additional iron ore mined is expected to generate a revenue of $18 million per year, which is forecasted to increase by 2.5% per annum due to higher demand from China. As a result of the additional complexities involved with the construction and management of this project, 7 new engineers (yearly salary per engineer $145,000) will replace 1 1 existing engineers (yearly salary per engineer $105,000). The 1000 additional construction labour required for this project is expected to cost $6.2 million per annum for the duration of the project. For tax reasons you will expense the cost of the ANFO facility immediately. The cost for the construction of the new "Crusher", 13-kilometre conveyor and associated slurry pumps, mixed floatation systems and other equipment will be depreciated over three years using the straight-line method. Due to the nature of the mining project, the crusher and associated systems and equipment will likely have a salvage value of $12 million at the end of three years. Finally, the required net working capital is $6.3 million which will be returned at the end of the project's lifetime.Balance Sheet of Rio Tinto as of 31 March 2020 Extract of Balance Sheet for Rio Tinto Issued Capital $ million 28,030,000 Ordinary shares of $83.0 fully paid 2326.49 6,800,000 3.1% Preference Shares of $81.0 fully paid 550.80 Current Liabilities and Provisions Bank Overdraft 93.00 Trade Creditors 41.00 Unsecured Notes 59.00 Non-Current Liabilities Debentures 88.00 Term Loans 67.00 Mortgage 91.00 The company's preference and ordinary shares are currently trading at $93.25 each. . The risk-free rate of return is 1.15 % p.a., and the return on the market is 5.5 % p.a. Debentures have a coupon interest rate of 7.4% p.a. and could be re-issued at the present time at an interest rate of 6.8% p.a. The debentures will be redeemed at their face value in six years' time. Face value is as per the balance sheet. The mortgage loan is repayable in four years' time and the current interest rate is 6.45% p.a. The mortgage was initially negotiated at 7.30% p.a. Term loans have a current interest rate of 6.8% p.a., but were negotiated at an interest rate of 7.2% p.a. They are repayable in full in five years' time. The term loans consists of regular semi-annually interest payments with the principal repaid at maturity Unsecured notes will mature in 12 months and will not be replaced. They have a current interest rate of 3.23% p.a. The current interest rate on the bank overdraft is 4.20% p.a. Interest on all debt securities is paid twice-yearly and the corporate tax-rate is 30 percent.Calculate WACC: The first part of the analysis requires you to work out the Weighted Average Cost of 3 Capital (WACC) for Rio Tinto. With the help of the given information and given data, you need to work out the individual costs' and value of each of the sources of capital and apply that to the WACC equation to work out theoverall weighted cost
