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 11 percent. Further, the company has only $20 million to invest in new projects this year. Cash Flows (in $ millions) Year CDMA G4 Wi-Fi 0 –$ 7 –$ 13 –$ 20 1 10 11 18 2 6.5 26 32 3 4.5 20 20 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

Answer 1.

Discount Rate = 11%

Project CDMA:

Present Value of Cash Inflow = $10,000,000/1.11 + $6,500,000/1.11^2 + $4,500,000/1.11^3
Present Value of Cash Inflow = $17,574,916.04

Profitability Index = Present Value of Cash Inflow / Initial Investment
Profitability Index = $17,574,916.04 / $7,000,000
Profitability Index = 2.51

Project G4:

Present Value of Cash Inflow = $11,000,000/1.11 + $26,000,000/1.11^2 + $20,000,000/1.11^3
Present Value of Cash Inflow = $45,635,920.80

Profitability Index = Present Value of Cash Inflow / Initial Investment
Profitability Index = $45,635,920.80 / $13,000,000
Profitability Index = 3.51

Project Wi-Fi:

Present Value of Cash Inflow = $18,000,000/1.11 + $32,000,000/1.11^2 + $20,000,000/1.11^3
Present Value of Cash Inflow = $56,811,961.71

Profitability Index = Present Value of Cash Inflow / Initial Investment
Profitability Index = $56,811,961.71 / $20,000,000
Profitability Index = 2.84

Answer 2.

Project CDMA:

Net Present Value = Present Value of Cash Inflow - Initial Investment
Net Present Value = $17,574,916.04 - $7,000,000
Net Present Value = $10,574,916.04

Project G4:

Net Present Value = Present Value of Cash Inflow - Initial Investment
Net Present Value = $45,635,920.80 - $13,000,000
Net Present Value = $32,635,920.80

Project Wi-Fi:

Net Present Value = Present Value of Cash Inflow - Initial Investment
Net Present Value = $56,811,961.71 - $20,000,000
Net Present Value = $36,811,961.71