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 12 percent. Further, Pixie Group has only $25 million to invest in new projects this year.

  

Cash Flows (in $ millions)

Year	CDMA			G4			Wi-Fi
0	–$	6.0		–$	19		–$	25
1		10.0			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
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

Profitability index is calculated using the formula:

The present value of all cash flows can be calculated in excel using the NPV function after which profitability index can be calculated. The answers are as shown:

The formulas used are as shown: