5. As a financial manager of Mango PLC your task is to analyze all financial decisions...

 

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5. As a financial manager of Mango PLC your task is to analyze all financial decisions of the firm. According the financial statements, Mango revenues last year reached 1,500 mln, operating costs (without depreciation) were as high as 50% of revenues, while depreciation and amortization expenses accounted for 300 mln. Corporate tax rate is 30%. Mango is all- equity financed at the moment. Currently your company is considering on the possibility of buying one of the two alternative equipment types. The equipment is necessary for the new product launching. You know the following characteristics of the equipment: Equipment A requires 150 mln as initial investment. The equipment has a 2-year lifespan. Your junior manager calculated that this model could increase Mango's EBITDA by 150 mln per year and could be sold at its book value of 20 mln at the end of the second year. Equipment B requires 200 mln as initial investment. The equipment has a 3-year lifespan. Your junior manager calculated that this model could increase Mango's EBITDA by 130 mln per year and could be sold at its book value of 30 min at the end of the third year. Mango employs straight line depreciation for its equipment. You also believe that the risk of both projects equals your firms' average investment risk. Mango operates on the market where investors believe in CAPM. Beta of equity is 1.2. Risk free asset gives 4% return. Market risk premium is 10%. Choose the most efficient type of equipment for Mango. Justify your choice of investment criterion. 5. As a financial manager of Mango PLC your task is to analyze all financial decisions of the firm. According the financial statements, Mango revenues last year reached 1,500 mln, operating costs (without depreciation) were as high as 50% of revenues, while depreciation and amortization expenses accounted for 300 mln. Corporate tax rate is 30%. Mango is all- equity financed at the moment. Currently your company is considering on the possibility of buying one of the two alternative equipment types. The equipment is necessary for the new product launching. You know the following characteristics of the equipment: Equipment A requires 150 mln as initial investment. The equipment has a 2-year lifespan. Your junior manager calculated that this model could increase Mango's EBITDA by 150 mln per year and could be sold at its book value of 20 mln at the end of the second year. Equipment B requires 200 mln as initial investment. The equipment has a 3-year lifespan. Your junior manager calculated that this model could increase Mango's EBITDA by 130 mln per year and could be sold at its book value of 30 min at the end of the third year. Mango employs straight line depreciation for its equipment. You also believe that the risk of both projects equals your firms' average investment risk. Mango operates on the market where investors believe in CAPM. Beta of equity is 1.2. Risk free asset gives 4% return. Market risk premium is 10%. Choose the most efficient type of equipment for Mango. Justify your choice of investment criterion.

Answer rating: 100% (QA)

To determine the most efficient type of equipment for Mango we will calculate the Net Present Value ... View the full answer