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.)

b. Calculate the NPV for each investment. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)

Answer 1

To calculate the profitability index, divide the present value of cash flows by the initial investment. Each cash flow is discounted using the discount rate, and the present values are divided by the initial investment.

Step-by-step explanation:

To calculate the profitability index for each investment, we need to divide the present value of each project's cash flows by the initial investment. The present value (PV) of each cash flow is calculated by multiplying the cash flow by the discount factor, which is determined by the discount rate and the time period. After calculating the present values, we divide them by the initial investment to get the profitability index.

For example, let's calculate the profitability index for the CDMA project:

Year 1: PV = $10 / (1 + 0.11) = $8.93

Year 2: PV = $6.5 / (1 + 0.11)^2 = $4.85

Year 3: PV = $4.5 / (1 + 0.11)^3 = $3.08

Profitability Index for CDMA = (PV of cash flows) / Initial investment = ($8.93 + $4.85 + $3.08) / $7 = 2.38

Following the same steps, we can calculate the profitability index for the G4 and Wi-Fi projects.