Comprehensive Analysis of Rio Tinto's Financing and Capital Budgeting

This report analyzes Rio Tinto's financing and capital budgeting strategies, drawing from the 2019 Annual Report and Yahoo Finance data. Part A examines how Rio Tinto aligns manager and shareholder interests, the types of non-current debt used, and the risks and benefits associated with them. It also discusses the impact of currency exchange rates, budget control methods, and inventory management using ratios. Part B focuses on capital budgeting, including net present value and payback period calculations for potential investments in boring machines from two suppliers, Cleanbore and Toto, and factors influencing investment decisions. The analysis provides insights into Rio Tinto's financial performance and strategic choices, offering a comprehensive overview of their financial management practices.

Financing and capital
budgeting

TABLE OF CONTENTS
PART A: Financing................................................................................................................3
PART B: Capital Budgeting...................................................................................................4
REFERENCES...........................................................................................................................6

PART A: Financing
a. Company has been able to align the manager and shareholders interest by implementing
the strategies that aims that achieving the industry standards, enhancing the financial strength
(Girella, Rossi and Zambon, 2019). For example, in 2019, because of its volume strategy and
strong markets assist the company in delivering the robust financial performance. In 2019,
special dividend of $1.0bn and ordinary dividend of $6.2bn. The earning per share has been
382 US cents per share as compared 307 US cents per share.
b. Debts like Euro bonds, and other bonds, debentures, insured loans, commercial banks loan,
credit agencies loan, international financial institutions loan, other secured and unsecured
loans and lease liabilities. Using these non-current debts, reduces the borrowing capacity of
the business and it also put burden on the earnings of the company. This increases the risk of
making payment of its as it is subject to interest rate risk, prepayment risk, liquidity risk and
so forth.
c. The UD dollar currency is used by the company. Weighted average exchange rate is used
for translation and while analysing the company’s financials the shift in the exchange rate
leads to significant impact over the revenue and profits. Even the working capital is also
affected. It can have a positive and negative impact over the financials of the busines
affecting its earnings.
d. The figures in the annual report is being compared with the budgets prepared in order to
identify the differences between the two and reasons for each difference. Based on this,
corrective steps are taken by the organization for the purpose of exercising control over the
elements of cost and other expenses. Through, this next year budget is made more accurately.
e.
Particulars Formula 2018 2019
Inventory 3447000 3463000
Total revenue 40522000 43165000
Cost of goods sold 20339000 19805000
Inventory turnover
ratio
Total
revenue/Inventor
y
11.76
days
12.46
days
Days sales of
inventory
Inventory/cost of
sales
61.86
days
63.82
days
From above it can be seen that there is a minor increase in the inventory turnover ratio
of the company which means that company is effective in selling out is inventory in a given
time period. The days sales of inventory depict how much time company takes to create
inventory and turn into revenue. It is favourable to have smaller ratio but, in this case, it is
increasing thus, company needs to focus on the same in order to manage it effectively.
f. On 30 March 2020, the share price was $87.54 and on 30 October 2019, the price was
$87.66, investors were at the favourable place as after that the share price rises which was
profitable for the investors. The major risk is loss of capital, any negative development or
event will affect the price significantly as it is prone to higher volatility.

PART B: Capital Budgeting
a. Computing net present value of purchasing boring machine
Year
Toto Cash flow
(per unit)
Discoun
ting
factor
@4%
Presen
t value
of cash
flow
Cleanbore
(per unit)
Discoun
ting
factor
@4%
Prese
nt
value
of
cash
flow
0 -1200000 1
-
120000
0 -1400000 1
-
14000
00
1 400000 0.9615
384615
.38 400000 0.9615
38461
5.38
2 420000 0.9246
388313
.61 500000 0.9246
46227
8.11
3 800000 0.8890
711197
.09 1005000 0.8890
89344
1.34
Present
value of
cash inflow
148412
6.08
17403
34.8
Cash
outflow
120000
0
14000
00
Net present
value
284126
.08
34033
4.83
b. Computation of payback period
Year
Toto Cash
flow (per
unit)
Cumulativ
e cash flow
Cleanbor
e (per
unit)
Cumulativ
e cash flow
0 -1200000 -1200000 -1400000 -1400000
1 400000 -800000 400000 -1000000
2 420000 -380000 500000 -500000
3 800000 420000 1005000 505000
Payback
period 2.475 years 2.497 years
c. The Rio Tinto company should purchase the boring machines from the Cleanbore supplier
because the net present value derived from it more than that of Toto supplier. The payback
period of the two is approximately same and almost covers the life of the asset which means
that company should not make a purchase from any of them (Alkaraan, 2020). Therefore, the
Rio Tinto company should go with Cleanbore supplier for buying the machine which seems
to be more feasible and profitable in terms of net present value.
d. Other than capital budgeting, the factors that influences the decision making are – changes
in the market trend, advancement in the technology, competitors move in the industry which
might have a huge impact over the business in the business. Purchasing the machinery now,

would be helpful in the future or not. Tax concession in terms of new investment and
allowing depreciation deduction allowance also has an influence over the decision making.

REFERENCES
Books and Journals
Girella, L., Rossi, P. and Zambon, S., 2019. Exploring the firm and country determinants of
the voluntary adoption of integrated reporting. Business Strategy and the
Environment. 28(7). pp.1323-1340.
Alkaraan, F., 2020. Strategic investment decision-making practices in large manufacturing
companies. Meditari Accountancy Research.