Profitability Index versus NPV Hanni Group, a consumer electronics conglomerate,

Question

Profitability Index versus NPV Hanni Group, a consumer electronics conglomerate, is reviewing its annual budget in wireless technology. It is considered investments in 3 different technologies to develop wireless communication devices. Consider the following cash flows of the 3 independent projects for Hanni. Assume the discount rate for Hanni is 10%. Further, Hanni Group has only $20 million to invest in new projects this year. Cash flows in ($ millions) Year 0 -$8 CDMA, -$12 G4, -$20 Wi-Fi, Year 1 $11 CDMA, $10 G4, $18 Wi-Fi, Year 2 $7.5 CDMA, $ 25 G4, $32 Wi-Fi, Year 3 $2.5 CDMA, $20 G4, $20 Wi-Fi,

Explanation / Answer

NPV of CDMA= -8+(11/1.1)+(7.5/1.1^2)+(2.5/1.1^3)=$10.0766million

PI= 2.26

NPV of G$= -12+(10/1.1)+(25/1.1^2)+(20/1.1^3)=$12.36million

PI= 2.03

NPV of wifi=-20+(18/1.1)+(32/1.1^2)+(20/1.1^3)=$37.836million

PI= 2.892

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