Hanmi Group, a consumer electronics conglomerate, is reviewing its annual budget

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 for Hanmi. Assume the discount rate for Hanmi is 11 percent. Further, Hanmi Group has only $33 million to invest in new projects this year.

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 for Hanmi. Assume the discount rate for Hanmi is 11 percent. Further, Hanmi Group has only $33 million to invest in new projects this year.

Explanation / Answer

step1:

calculate Present value of cash flows(PV) starting from year 1

PV of CDMA = 14/(1+11%) + 10.5/(1+11%)^2 + 7.5/(1+11%)^3 = 26.6185835214 million

PV of G4 = 21/(1+11%) + 36/(1+11%)^2 + 33/(1+11%)^3 =   72.2666420986 million

PV of wifi = 31/(1+11%) + 45/(1+11%)^2 + 33/(1+11%)^3 = 88.5802530068 million

step2:

a)

profitability index(PI) = PV of cash flows from year 1 / initial investment

Initial investment is the negative cash flow in year 0

PI of CDMA = 26.6185835214/10 = 2.62

PI of G4 = 72.2666420986/23 = 3.14

PI of Wi-Fi = 88.5802530068/33 = 2.68

step3:

b)

NPV = PV of cash flows from year 1- initial investment

NPV of CDMA = (26.6185835214 - 10) million = $16,618,583.52

NPV of G4 = (72.2666420986 - 23) million = $49.266,642.10

NPV of Wi=Fi = ( 88.5802530068 - 33) million = $55,580,253.01

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