Rio Tinto Case Study: Governance, Community, Debt & Capital Budgeting

This report provides a comprehensive financial analysis of Rio Tinto, a British-Australian multinational mining corporation. It examines Rio Tinto's corporate governance structure, highlighting strategies to align manager and shareholder interests, and discusses the company's commitment to community and environmental benefits, assessing the potential impact on its share price. The report also analyzes Rio Tinto's debt levels, comparing 2011 and 2012, and explores the reasons behind increased debt. Furthermore, it includes a capital budgeting exercise, calculating cash flows, Net Present Value (NPV), and Internal Rate of Return (IRR) for a proposed project, ultimately advising Rio Tinto on the viability of the investment. A second investment proposal is also assessed using NPV and IRR. The document concludes with references to support the analysis. Desklib provides a platform for students to access similar solved assignments and past papers for their academic needs.

Finance Assignment

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
a. Explaining the corporate governance process followed by Rio Tinto.................................3
b. Describing the benefits which are offered by Rio Tinto to community and environment. .3
c. Stating reasons behind increasing debt level in 2012 as compared to 2011........................4
REFERENCES................................................................................................................................5

INTRODUCTION
In the business organisation, finance is one of the crucial elements which have a high
level of influence on the growth and success of the firm. Thus, it is the accountability of manager
to ensure proper allocation and usage of the fund by taking into consideration the different tools.
This project report is based on Rio Tinto which is one of the largest British-Australian
multinational operating in the mining sector. In this regard, present report will shed light on the
aspects of corporate governance, environment report presented by Rio Tinto. Besides this, it will
also develop understanding of several financial techniques such as capital budgeting, CAPM
model and construction of the suitable portfolio.
TASK 1
a. Explaining the corporate governance process followed by Rio Tinto
Rio Tinto has organized corporate governance in a highly structured manner. With the
motive to develop and maintain an effective relationship with the stakeholders, Board made
discussion with senior managers regarding the strategy was undertaken. In such discussion,
presentations were given by senior management about the strategic and policy framework of the
company (Rainey and et.al., 2015). Besides this, directors have made a review of financial
aspects on a regular interval with the aim to assess the present in the existing performance level.
Along with this, in 2015, new members of the board visited the mining operations to get
proper knowledge about the company’s activities and staff. In the accounting year 2015, share
prices were decreased significantly which is not a good indicator. However, business unit has
reduced the level of expenses by $3.5 billion to $4.7billion. Such strategy provided assistance to
the firm in enhancing the profit margin (Annual report of Rio Tinto, 2015). This, in turn, helps in
enhancing profit for distributing among the shareholders. This strategy of Rio Tinto clearly
shows alignment in the interest level of management and shareholders.
b. Describing the benefits which are offered by Rio Tinto to community and environment
Rio Tinto has made major contribution to the growth and development of the community
as well as environment. Out of 100 business unit has attained the rates of 57 in comparison to

other companies. Moreover, several jobs were offered by Rio Tinto to the people of the local
community. Besides this, the company has made a major contribution to the development of the
community by giving charities for health programs, educational aspects, etc. Along with this, a
company also places emphasis on using natural resources which in turn reduces the negative
impact of business activities on eco or earth system. It focuses on energy efficient activities and
development of renewable sources by taking the assistance of the alternative as well as high-tech
aspects. In addition to this, the business unit also complied with the environmental rules while
performing the business activities and functions (Chikozho and Jongh, 2014). Thus, all such
aspect created an effective image of the company in the mind of stakeholders and thereby placed
a positive impact on share prices of the firm.
c. Stating reasons behind increasing debt level in 2012 as compared to2011
There are several reasons due to which debt level increased in 2012 as compared to 2011
which includes exchange rate fluctuations and price movements. In the year of 2012, net
earnings decreased by the US $ 1289 million (Annual report of Rio Tinto, 2012). Hence, dueto
the high reductions in earning level Rio Tinto had taken more debt to carry out the activities
more effectively and efficiently.
TASK 2
a. Calculating cash flows and NPV of the project
Calculation of cash flows
Y
ea
r
Sales
(in $)
Expe
nses
Depre
ciatio
n
Tota
l
profi
t tax
Profit
after
tax
Cash
flows Adjustments
Ann
ual
cash
inflo
ws
(in
$)
1
2000
0000
0
1000
0000
0
48500
000
1485
0000
0
5150
0000
154
500
00
360500
00
8455
0000
15000000
(Outflow)
6955
0000
2
2500
0000
0
1250
0000
0
48500
000
1735
0000
0
7650
0000
229
500
00
535500
00
1020
5000
0
1020
5000
0
3 3250 1625 48500 2110 1140 342 798000 1283 1283

0000
0
0000
0 000
0000
0
0000
0
000
00 00
0000
0
0000
0
4
3000
0000
0
1500
0000
0
48500
000
1985
0000
0
1015
0000
0
304
500
00
710500
00
1195
5000
0
1195
5000
0
5
1500
0000
0
7500
0000
48500
000
1235
0000
0
2650
0000
795
000
0
185500
00
6705
0000
157500000
(Scrap value
inflow)
2245
5000
0
Calculation of Net present value (NPV)
Year
Ann
ual
cash
inflo
ws
(in
$)
PV
factor @
10%
Discounted
cash inflow (in
$)
1
6955
0000 0.909 63220950
2
1020
5000
0 0.826 84293300
3
1283
0000
0 0.751 96353300
4
1195
5000
0 0.683 81652650
5
2245
5000
0 0.621 139445550
Total discounted
cash inflows
(TDCF) 464965750
Initial investment
(II) 422500000
Net present value
(TDCF - II) 42465750
b. Assessing the IRR of project
Calculation of Internal rate of return (IRR)

Year
Annual
cash
inflows (in
$)
-422500000
1 69550000
2 102050000
3 128300000
4 119550000
5 224550000
IRR 13%
c. Suggesting suitable project to Rio-Tinto
From the above mentioned calculation, it has been assessed that Rio Tinto will get
$42465750 after the period of five years. Hence, value of NPV is higher than the initial
investment which is positive indicator for the firm. Thus, by investing money in such proposed
investment Rio Tinto will get the desired level of outcome or success. Along with this, IRR of
such investment proposal is 13% which is not higher than the average industry level. However,
NPV is one of the most effectual techniques which in turn provide investors with the highly
realistic information for decision making. Moreover, it considers time value of money concept
and helps company in making selection of suitable project. Thus, by considering the outcome of
NPV it can be said that Rio Tinto should proceed with such project.
Further, company can also undertake payback for assessing the period within which
business unit will recoup the initial investment. Hence, by taking into account into consideration
such method business unit can assess the time period after which it would become able to get
profit margin. In this way, such technique helps in making effectual plan for the near future.
Besides this, it also helps business organization in taking decision whether it should proceed with
such proposal or not. Moreover, when business unit takes long time to recover the initial
investment then it negatively affects the profit margin of firm. Thus, payback period method will
help company in evaluating the several alternatives in an appropriate manner.

d. Assessing the viability of investment proposal
Calculation of cash flows
Y
ea
r
Sales
(in $)
Expe
nses
Depre
ciation
Total
expense
s
Profi
t tax
Profit
after
tax
Cash
flows
Adjust
ments
Annu
al
cash
inflo
ws
(in $)
1
20000
0000
1400
0000
0
606250
00
200625
000
-
6250
00 -625000
60000
000
150000
00
4500
0000
2
25000
0000
1250
0000
0
606250
00
173500
000
7650
0000
2295
0000
5355000
0
11417
5000
1141
7500
0
3
32500
0000
1625
0000
0
606250
00
211000
000
1140
0000
0
3420
0000
7980000
0
14042
5000
1404
2500
0
4
30000
0000
1500
0000
0
606250
00
198500
000
1015
0000
0
3045
0000
7105000
0
13167
5000
157500
000
2891
7500
0
5
15000
0000
7500
0000
123500
000
2650
0000
7950
000
1855000
0
18550
000
1855
0000
Computation of NPV and IRR
year
Annual cash inflows
(in $)
PV factor
@ 12%
Discounted
cash flows
(in $)
1 45000000 0.893 40178571.43
2 114175000 0.797 91019610.97
3 140425000 0.712 99951741.3
4 289175000 0.636 183775940.3
5 18550000 0.567 10525768.17
Total
discounted
cash inflows 425451632.2
Initial
investment 422500000

NPV 2951632.19
Computation of IRR
Year Annual cash inflows (in $)
Initial investment -422500000
1 45000000
2 114175000
3 140425000
4 289175000
5 18550000
IRR 12%
The above mentioned table presents that NPV and IRR of the investment proposal is
$2951632.19 & 12%. Hence, it has been identified that return of the firm is affected in the
decreasing pattern when cost of capital increases. Besides this, amount of return of such proposal
also decreased due to the rise in the level of expenses. Hence, company should invest money in
the above mentioned proposal which will prove to be more beneficial for it in financial terms.

REFERENCES
Chikozho, C. and Jongh, D. D., 2014. Restoring degraded landscapes: Assessing the utility of
biodiversity offsets for the business sector in Africa. International Journal of African
Renaissance Studies-Multi-, Inter-and Transdisciplinarity. 9(2). pp. 61-76.
Rainey, H. J., and et.al., 2015. A review of corporate goals of No Net Loss and Net Positive
Impact on biodiversity. Oryx. 49(02). pp. 232-238.
Online
Annual report of Rio Tinto. 2012. [Online]. Available through:
<http://www.riotinto.com/documents/rio_tinto_2012_annual_report.pdf>. [Accessed on
28th December 2016].
Annual report of Rio Tinto. 2015. [pdf]. Available through:
<http://www.riotinto.com/documents/RT_Annual_Report_2015.pdf>. [Accessed on 28th
December 2016].