Question

Broxton 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. Assume the discount rate is 10 percent. Further, the company has only $22 million to invest in new projects this year.

Cash Flows (in $ millions)

Year	L6			G5			Wi-Fi
0	−$	7.0		−$	15		−$	22
1		12.0			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.)

	Profitability index
L6	3.16 3.16 Correct
G5	3.26 3.26 Correct
Wi-Fi	2.85 2.85 Correct

b. Calculate the NPV for each investment. (Enter your answers in dollars, not millions of dollars. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 1,234,567.89.)

	NPV
L6	$ 8.14 8.14 Incorrect
G5	$ 18.92 18.92 Incorrect
Wi-Fi	$ 18.72 18.72 Incorrect

Answer 1

Solution a& b:

Computation of NPV & Profitability Index
			L6		G5		Wifi
Particulars	Period	PV Factor (10%)	Amount	Present Value	Amount	Present Value	Amount	Present Value
Cash outflows:
Initial investment	0	1	$7,000,000.00	$7,000,000.00	$15,000,000.00	$15,000,000.00	$22,000,000.00	$22,000,000.00
Present Value of Cash outflows (A)				$7,000,000.00		$15,000,000.00		$22,000,000.00
Cash Inflows
Year 1	1	0.909091	$12,000,000.00	$10,909,090.91	$12,000,000.00	$10,909,090.91	$19,000,000.00	$17,272,727.27
Year 2	2	0.826446	$9,500,000.00	$7,851,239.67	$26,000,000.00	$21,487,603.31	$35,000,000.00	$28,925,619.83
Year 3	3	0.751315	$4,500,000.00	$3,380,916.60	$22,000,000.00	$16,528,925.62	$22,000,000.00	$16,528,925.62
Present Value of Cash Inflows (B)				$22,141,247.18		$48,925,619.83		$62,727,272.73
Net Present Value (NPV) (B-A)				$15,141,247.18		$33,925,619.83		$40,727,272.73
Profitability Index (PV of cash inflows / PV of cash outflows) (B/A)				3.16		3.26		2.85