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 (11%).

7- Calculate net present value (NPV) for the above investment decision using excel (make formulas viewable). Would you accept or reject this investment decision? Why?

I would accept this investment because the NPV of $659,536 is positive.

8- Calculate payback period. If you know that google accepts projects with 4 years payback period using excel (make formulas viewable). Would you accept that project?

I would not accept the project because the payback period is 4.25 years which is higher than the required payback period of 4 years.

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

I would accept this project since IRR is positive.

10- Calculate the average accounting return (AAR) using excel (make formulas viewable). If you know that the required average accounting return is 25%. Would you accept that project?

I would not accept the project because the AAR of 15.2% is lower than required of 25%.

11- Calculate profitability index of the above project using excel (make formulas viewable). Would you accept or reject that deal? Why?

Answer 1

Q.7. Calculation of Net Present Value

Remember, the net cash flow is of our use in investment decision making.

Year	Net Cash Flows (in Billion $)	Present Value
0	$12.50	$12.50
1	$1.50	$1.35
2	$2.50	$2.03
3	$4.00	$2.92
4	$3.00	$1.98
5	$6.00	$3.56
	NPV =	$0.66

As the NPV is $-0.66 Billion, the investment shall be rejected, having negative NPV.

Following are the formulas:

Q.8. Calculation of Payback period

Year	Net Cash Flows (in Billion $)	Cummulative Cashflows
0	$12.50
1	$1.50	$1.50
2	$2.50	$4.00
3	$4.00	$8.00
4	$3.00	$11.00
5	$6.00	$17.00

Payback period = 4 + 1.50/17 = 4.09 Years

Since the payback period is more than the threshold period of 4 years for the company, we won't accept the project.

Q.9. Calculation of IRR

Year	Net Cash Flows (in Billion $)	Present Value
0	$12.50	$12.50
1	$1.50	$1.35
2	$2.50	$2.03
3	$4.00	$2.92
4	$3.00	$1.98
5	$6.00	$3.56
	NPV =	$0.66
	IRR =	9.24%

We will reject the project because the IRR of 9.24% is below the WACC of 11%.

Q.Calculation of AAR

Year	Net Income (in Billion $)
1	$1.00		Initial Investment	$12.50
2	$2.00		Salvage Value	$3.50
3	$3.00		ARR	37.50%
4	$2.00
5	$1.50

Since AAR is more than 25%, we can accept the project.

Q.11. Calculation of Profitability Index

				WACC	11%
Year	Net Cash Flows (in Billion $)	Present Value
1	$1.50	$1.35
2	$2.50	$2.03
3	$4.00	$2.92
4	$3.00	$1.98
5	$6.00	$3.56
	Initial Investment	$12.50
	Profitability Index =	0.947365908

Since PI is below 1, the project will be rejected.