In: Finance
Motorola Mobility LLC is a company that develops mobile devices. Headquartered in Chicago, Illinois, United States, the company was formed on January 4, 2011 by the split of Motorola Inc. into two separate companies; Motorola Mobility took on the company's consumer-oriented product lines, including its mobile phone business and its cable modems and set-top boxes for digital cable and satellite television services, while Motorola Solutions retained the company's enterprise-oriented product lines. Early 2012, Google decided to purchase Motorola mobility LLC for $12.5b. Google had a plan to keep Motorola mobility for 5 years. Google financial analysis team made the following forecasts:
Year |
Cash flow(in billions) |
Net income (in billions) |
2012 |
1.5 |
1 |
2013 |
2.5 |
2 |
2014 |
4 |
3 |
2015 |
3 |
2 |
2016 |
6 (includes 3.5b selling price) |
1.5 |
And that the average book value of asset is $8b and Google’s required rate of return is its WACC.
7- Calculate payback period USING EXCEL. If you know that google
accepts projects with 4 years payback period. Would you accept that
project?
7). Payback period = time taken for the investment to break even.
Formula | Year (n) | 0 | 1 | 2 | 3 | 4 | 5 |
Cash flow (CF) | (12.50) | 1.50 | 2.50 | 4.00 | 3.00 | 6.00 | |
CFn-1 + CCFn | Cumulative Cash flow (CCF) | (12.50) | (11.00) | (8.50) | (4.50) | (1.50) | 4.50 |
-CCF4/CF5 | Fraction of year 5 (F) | 0.25 | |||||
(4 + F) | Payback period (in years) | 4.25 |
Payback period is 4.25 years which is higher than the required payback period of 4 years so the project would not be accepted.