Mf1. Mega Coal plc has bought land that contains deposits of coal that will be mined. The land is expected to produce coal for five years and then the land will be sold. The initial costs involved in buying the land and equipment for mining are $3 000 000. The finance director suggested two possible methods to finance the robot project: ⚫ Option A - a bank loan for the full £3 000 000, at an interest rate of 12% per year. • Option B-a funding package from a range of sources. The details are shown below. Required: (1) Calculate the weighted average cost of capital for Option B. (2) Identify which of the two options, A or B, would be the best to finance the project, giving a reason for your answer. (3) Explain two reasons why the interest rate on a bank loan may be higher than the expected return of an ordinary shareholder. The following information is available. ⚫ In Years 1 to 5, sales will be 390 tons of coal per week, at a selling price of $60 per ton. ⚫ In Years 1 to 5, the expected running costs (including depreciation) are expected to be $19 000 per week. ⚫ On the last day of Year 5, the land and equipment will be sold for $500 000. ⚫ The land and equipment will be worked for 50 weeks in a year. Required: (4) Calculate the net cash flow for each of the five years of the project.
Mf1.
Mega Coal plc has bought land that contains deposits of coal that will be mined. The land is expected to produce coal for five years and then the land will be sold. The initial costs involved in buying the land and equipment for mining are $3 000 000. The finance director suggested two possible methods to finance the robot project:
⚫ Option A - a bank loan for the full £3 000 000, at an interest rate of 12% per year.
• Option B-a funding package from a range of sources. The details are shown below.
Required:
(1) Calculate the weighted average cost of capital for Option B.
(2) Identify which of the two options, A or B, would be the best to finance the project, giving a reason for your answer.
(3) Explain two reasons why the interest rate on a bank loan may be higher than the expected return of an ordinary shareholder.
The following information is available.
⚫ In Years 1 to 5, sales will be 390 tons of coal per week, at a selling price of $60 per ton.
⚫ In Years 1 to 5, the expected running costs (including
⚫ On the last day of Year 5, the land and equipment will be sold for $500 000.
⚫ The land and equipment will be worked for 50 weeks in a year.
Required:
(4) Calculate the net cash flow for each of the five years of the project.
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