Question

Hanmi Group, a consumer electronics conglomerate, is reviewing its annual budget in wireless technology. It is considering investments in three different technologies to develop wireless communication devices. Consider the following cash flows of the three independent projects available to the company. Assume the discount rate for all projects is 10 percent. Further, the company has only $22 million to invest in new projects this year.

  

Cash Flows (in $ millions)

Year	CDMA			G4			Wi-Fi
0	–$	7		–$	15		–$	22
1		12			12			19
2		9.5			26			35
3		4.5			22			22

  

a.	Calculate the profitability index for each investment. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
b.	Calculate the NPV for each investment. (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89)

Answer 1

Discount Rate = 10%

CDMA:

Present Value of Cash Inflows = $12,000,000 / 1.10 + $9,500,000 / 1.10^2 + $4,500,000 / 1.10^3
Present Value of Cash Inflows = $22,141,247.18

Profitability Index = Present Value of Cash Inflows / Initial Investment
Profitability Index = $22,141,247.18 / $7,000,000
Profitability Index = 3.16

Net Present Value = Present Value of Cash Inflows - Initial Investment
Net Present Value = $22,141,247.18 - $7,000,000
Net Present Value = $15,141,247.18

G4:

Present Value of Cash Inflows = $12,000,000 / 1.10 + $26,000,000 / 1.10^2 + $22,000,000 / 1.10^3
Present Value of Cash Inflows = $48,925,619.83

Profitability Index = Present Value of Cash Inflows / Initial Investment
Profitability Index = $48,925,619.83 / $15,000,000
Profitability Index = 3.26

Net Present Value = Present Value of Cash Inflows - Initial Investment
Net Present Value = $48,925,619.83 - $15,000,000
Net Present Value = $33,925,619.83

Wi-Fi:

Present Value of Cash Inflows = $19,000,000 / 1.10 + $35,000,000 / 1.10^2 + $22,000,000 / 1.10^3
Present Value of Cash Inflows = $62,727,272.73

Profitability Index = Present Value of Cash Inflows / Initial Investment
Profitability Index = $62,727,272.73 / $22,000,000
Profitability Index = 2.85

Net Present Value = Present Value of Cash Inflows - Initial Investment
Net Present Value = $62,727,272.73 - $22,000,000
Net Present Value = $40,727,272.73