Question

Pixie 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 for Pixie. Assume the discount rate is 9 percent. Further, Pixie Group has only $29 million to invest in new projects this year.

  

Cash Flows (in $ millions)

Year	CDMA			G4			Wi-Fi
0	–$	8.0		–$	21		–$	29
1		12.0			19			27
2		8.5			34			41
3		5.5			29			29

  

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
CDMA
G4
Wi-Fi

b.	Calculate the NPV for each investment. (Enter your answers in dollars, not millions of dollars (e.g., 1,234,567). Do not round intermediate calculations and round your answers to 2 decimal places (e.g., 32.16).)

  

	NPV
CDMA	$
G4	$
Wi-Fi	$

Answer 1

Statement showing Cash flows			CDMA		G4		Wi -Fi
Particulars	Time	PVf 9%	Amount	PV	Amount	PV	Amount	PV
Cash Outflows	-	1.00	(8.00)	(8.00)	(21.00)	(21.00)	(29.00)	(29.00)
PV of Cash outflows = PVCO				(8.00)		(21.00)		(29.00)
Cash inflows	1.00	0.9174	12.00	11.01	19.00	17.43	27.00	24.77
Cash inflows	2.00	0.8417	8.50	7.15	34.00	28.62	41.00	34.51
Cash inflows	3.00	0.7722	5.50	4.25	29.00	22.39	29.00	22.39
PV of Cash Inflows =PVCI				22.41		68.44		81.67
NPV= PVCI - PVCO				14.41		47.44		52.67
PI = PVCI/PVCO				2.80		3.26		2.82
Profitability index
CDMA	2.80
G4	3.26
Wi-Fi	2.82
NPV
CDMA	14.41
G4	47.44
Wi-Fi	52.67