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 $25 million to invest in new projects this year.

  

Cash Flows (in $ millions)

Year	CDMA			G4			Wi-Fi
0	–$	6		–$	19		–$	25
1		10			17			23
2		6.5			32			37
3		3.5			25			25

   

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	1.765 1.765 Incorrect
G4	2.08 2.08 Incorrect
Wi-Fi	1.71 1.71 Incorrect

    

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	$ 10.6 10.6 Incorrect
G4	$ 39.48 39.48 Incorrect
Wi-Fi	$ 42.83 42.83 Incorrect

Answer 1

(a.) Calculation of Profitability Index

Profitability Index = Present value of Cash Inflow / Present Value of Cash Outflow

For Project CDMA

Year	Cah Flows	PVF @12%	Present Value of Cash Flow
1	10000000	0.892857143	8928571.429
2	6500000	0.797193878	5181760.204
3	3500000	0.711780248	2491230.867
		Present Value of Cash Inflow	16,601,562.5

Profitability Index = Present value of Cash Inflow / Present Value of Cash Outflow

= 16,601,562.5 / 6,000,000

= 2.766927083 or 2.77

For Project G4

Year	Cah Flows	PVF @12%	Present Value of Cash Flow
1	17000000	0.892857143	15178571.43
2	32000000	0.797193878	25510204.08
3	25000000	0.711780248	17794506.2
		Present Value of Cash Inflow	58,483,281.71

Profitability Index = Present value of Cash Inflow / Present Value of Cash Outflow

= 58,483,281.71 / 19,000,000

= 3.078067458 or 3.08

For Project WiFi

Year	Cah Flows	PVF @12%	Present Value of Cash Flow
1	23000000	0.892857143	20535714.29
2	37000000	0.797193878	29496173.47
3	25000000	0.711780248	17794506.2
		Present Value of Cash Inflow	67,826,393.95

Profitability Index = Present value of Cash Inflow / Present Value of Cash Outflow

= 67,826,393.95 / 25,000,000

=2.713055758 or 2.71

(b.) Calculation of NPV

NPV = Present Value of Cash Inflow - Present Value of Cash Outflow

For Project CDMA

Year	Cah Flows	PVF @12%	Present Value of Cash Flow
1	10000000	0.892857143	8928571.429
2	6500000	0.797193878	5181760.204
3	3500000	0.711780248	2491230.867
		Present Value of Cash Inflow	16,601,562.5

NPV = Present Value of Cash Inflow - Present Value of Cash Outflow

= 16,601,562.5 - 6,000,000

= $10,601,562.5

For Project G4

Year	Cah Flows	PVF @12%	Present Value of Cash Flow
1	17000000	0.892857143	15178571.43
2	32000000	0.797193878	25510204.08
3	25000000	0.711780248	17794506.2
		Present Value of Cash Inflow	58,483,281.71

NPV = Present Value of Cash Inflow - Present Value of Cash Outflow

= 58,483,281.71 -19,000,000

  = $39,483,281.71

For Project WiFi

Year	Cah Flows	PVF @12%	Present Value of Cash Flow
1	23000000	0.892857143	20535714.29
2	37000000	0.797193878	29496173.47
3	25000000	0.711780248	17794506.2
		Present Value of Cash Inflow	67,826,393.95

NPV = Present Value of Cash Inflow - Present Value of Cash Outflow

= 67,826,393.95 - 25,000,000

= $42,826,393.95