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 12 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 −$ 8.0 −$ 14 −$ 22 1 11.0 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.) Profitability index L6 G5 Wi-Fi 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 $ G5 $ Wi-Fi $

Answer 1

1)

L6 :

Profitability index = Present value / initial investment

Present value = 11 / (1 + 0.12)¹ + 7.5 / (1 + 0.12)² + 5.5 / (1 + 0.12)³

Present value = 19.7152

Profitability index = 19.7152 / 8

Profitability index = 2.46

G5 :

Profitability index = Present value / initial investment

Present value = 12 / (1 + 0.12)¹ + 27 / (1 + 0.12)² + 22 / (1 + 0.12)³

Present value = 47.8977

Profitability index = 47.8977 / 14

Profitability index = 3.42

Wi-Fi :

Profitability index = Present value / initial investment

Present value = 20 / (1 + 0.12)¹ + 34 / (1 + 0.12)² + 22 / (1 + 0.12)³

Present value = 60.6209

Profitability index = 60.6209 / 22

Profitability index = 2.76

2)

L6 :

NPV = Present value of cash inflows - present value of cash outflows

NPV = 19.7152 - 8

NPV = $11715174.02

G5 :

NPV = Present value of cash inflows - present value of cash outflows

NPV = 47.8977 - 14

NPV = $33897685.86

WI-FI :

NPV = Present value of cash inflows - present value of cash outflows

NPV = 60.6209 - 22

NPV = $38620900.15