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 12 percent. Further, the company has only $22 million to invest in new projects this year.

  

Cash Flows (in $ millions)

Year	CDMA			G4			Wi-Fi
0	–$	8		–$	14		–$	22
1		11			12			20
2		7.5			27			34
3		5.5			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.)
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)

Answer 1

a.CDMA

Profitability Index is a ratio of the discounted cash flow to the initial cash flow of the project. It is calculated using the below formula:

Profitability Index= NPV + Initial investment/ Initial investment

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$8 million. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 12%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 12% discount rate is $11.72 million.

Profitability Index= $11.72 million + $8 million/ $8 million

= $19.72 million / 8 million

= 1.47.

G4

Profitability Index is a ratio of the discounted cash flow to the initial cash flow of the project. It is calculated using the below formula:

Profitability Index= NPV + Initial investment/ Initial investment

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$14 million. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 12%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 12% discount rate is $33.90 million.

Profitability Index= $33.90 million + $14 million/ $14 million

= $47.90 million / $14 million

= 3.42.

Wi-Fi

Profitability Index is a ratio of the discounted cash flow to the initial cash flow of the project. It is calculated using the below formula:

Profitability Index= NPV + Initial investment/ Initial investment

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$22 million. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 12%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 12% discount rate is $38.62 million.

Profitability Index= $38.62 million + $22 million/ $22 million

= $60.62 million / $22 million

= 2.76.

b.CDMA

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$8 million. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 12%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 12% discount rate is $11.72 million.

G4

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$14 million. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 12%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 12% discount rate is $33.90 million.

Wi-Fi

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$22 million. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 12%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 12% discount rate is $38.62 million.

In case of any query, kindly comment on the solution.