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 11 percent. Further, the company has only $23 million to invest in new projects this year.

  

Cash Flows (in $ millions)

Year	CDMA			G4			Wi-Fi
0	–$	5		–$	18		–$	23
1		9			16			21
2		5.5			31			35
3		2.5			23			23

  

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)

    

A	CDMA	?
	G4	?
	WI-FI	?
B	CDMA	?
	G4	?
	WI-FI	?

Answer 1

A. The profitability index of project CDMA is computed as shown below:

= Present value of future cash flows / Initial investment

Present value is computed as follows:

= Future value / (1 + r)ⁿ

= $ 9 million / 1.11 + $ 5.5 million / 1.11² + $ 2.5 million / 1.11³

= $ 14.40000994 million

So, the PI will be as follows:

= $ 14.40000994 million / $ 5 million

= 2.88 Approximately

The profitability index of project G4 is computed as shown below:

= Present value of future cash flows / Initial investment

Present value is computed as follows:

= Future value / (1 + r)ⁿ

= $ 16 million / 1.11 + $ 31 million / 1.11² + $ 23 million / 1.11³

= $ 56.39211161 million

So, the PI will be as follows:

= $ 56.39211161 million / $ 18 million

= 3.13 Approximately

The profitability index of project WIFI is computed as shown below:

= Present value of future cash flows / Initial investment

Present value is computed as follows:

= Future value / (1 + r)ⁿ

= $ 21 million / 1.11 + $ 35 million / 1.11² + $ 23 million / 1.11³

= $ 64.14310585 million

So, the PI will be as follows:

= $ 64.14310585 million / $ 23 million

= 2.79 Approximately

B. The NPV of project CDMA is computed as shown below:

= Initial investment + Present value:

= - $ 5 million + $ 9 million / 1.11 + $ 5.5 million / 1.11² + $ 2.5 million / 1.11³

= $ 9,400,009.94

B. The NPV of project G4 is computed as shown below:

= Initial investment + Present value:

= - $ 18 million + $ 16 million / 1.11 + $ 31 million / 1.11² + $ 23 million / 1.11³

= $ 38,392,111.61

The NPV of project WIFI is computed as shown below:

= Initial investment + Present value:

= - $ 23 million + $ 21 million / 1.11 + $ 35 million / 1.11² + $ 23 million / 1.11³

= $ 41,143,105.85

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