Question

Calculate the average accounting return (AAR) using excel (make formulas viewable). If you know that the required average accounting return is 25%. Would you accept that project?

Calculate profitability index of the above project using excel (make formulas viewable). Would you accept or reject that deal? Why?

Motorola Mobility LLC is a company that develops mobile devices. Headquartered in Chicago, Illinois, United States, the company was formed on January 4, 2011 by the split of Motorola Inc. into two separate companies; Motorola Mobility took on the company's consumer-oriented product lines, including its mobile phone business and its cable modems and set-top boxes for digital cable and satellite television services, while Motorola Solutions retained the company's enterprise-oriented product lines. Early 2012, Google decided to purchase Motorola mobility LLC for $12.5b. Google had a plan to keep Motorola mobility for 5 years. Google financial analysis team made the following forecasts:

Year	Cash flow (in billions)	Net income (in billions)
2012	1.5	1
2013	2.5	2
2014	4	3
2015	3	2
2016	6 (includes 3.5b selling price)	1.5

And that the average book value of asset is $8b and Google’s required rate of return is its WACC.

Total capital = Common share capital + Preference share capital + Debt capital

Total capital = (5 million shares * $100) + (1 million shares * $100) + (1,00,000 Bonds * $1,124)

Total capital = $500 million + $100 million + $112.40 million = $712.40 million

Weight of debt = Debt / Total capital

Weight of debt = $112.40 / $712.40 million = 0.16

Weight of preference = Preference / Total capital

Weight of preference=$100/$712.40 million = 0.14

Weight of common shares = Common shares / Total capital

Weight of common shares = $500 / $712.40 million = 0.70

Cost of debt (before tax) = 3.43% or 0.0343

After tax cost of debt = Cost of debt * (1 - Tax rate @ 35% or 0.35)

After tax cost of debt = 0.0343 * (1 - 0.35) = 0.0223 or 2.23%

Cost of preference = 6% or 0.06

Cost of common shares = 13.76% or 0.1376

WACC = (0.16 * 0.0223) + (0.14 * 0.06) + (0.70 * 0.1376)

WACC = 0.0036 + 0.0084 + 0.0963

WACC = 0.1083 or 10.83%

Answer 1