Question

 

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 net present value (NPV) for the above investment decision. Would you accept or reject this investment decision? Why? (NOTE: RATE is 12.05%)

8- Calculate payback period. If you know that google accepts projects with 4 years payback period. Would you accept that project?

9- Calculate the Motorola project internal rate of return (IRR). Would you accept or reject this project? Why?

Answer 1

Cash flows are considered for capital budgeting and not Net Income.

Year	Cash flow(billions)	Cumulative cash flow
0	-12.5	-12.5
1	1.5	-11
2	2.5	-8.5
3	4	-4.5
4	3	-1.5
5	6	4.5

Q 7: NPV= - $1.03 billion. Reject the project since NPV is negative.

8. Payback formula= Year in which Cumulative CF is last negative -(Last negative cumulative CF/ CF of next year

Payback= 4.25 years.

Reject the project since payback should be less than 4.

9. IRR= 9.24%. Reject since IRR

Workings