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Profitability Index versus NPV and Comparing Investment Criteria

1. Profitability Index versus NPV
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 10%. Further, Hanmi Group has only %15 million to invest in new projects this year.
Year CDMA G$ Wi-Fi
0 ($5) ($10) ($15)
1 13 10 10
2 7 25 20
3 2 30 50
a. Based on the profitability index decision rule, rank these investments
b. Based on the NPV, rank these investments
c. Based on your findings in (a) and (b), what would you recommend to the CEO of Hanmi Group and why?

2. Comparing Investment Criteria
Consider the following cash flows of two mutually exclusive projects for AZ-Motorcars. Assume the discount rate for AZ-Motorcars is 10%.
Year AZM Mini SUV AZF Full SUV
0 ($300,000) ($600,000)
1 270,000 250,000
2 180,000 400,000
3 150,000 300,000
a. Based on the payback period, which project should be accepted?
b. Based on the NPV, which project should be accepted?
c. Based on the IRR, which project should be accepted?
d. Based on this analysis, is incremental IRR analysis necessary? If yes, please conduct the analysis.

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1. Profitability Index versus NPV
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 10%. Further, Hanmi Group has only %15 million to invest in new projects this year.
Year CDMA G$ Wi-Fi
0 ($5) ($10) ($15)
1 13 10 10
2 7 25 20
3 2 30 50
a. Based on the profitability index decision rule, rank these investments
Discount rate 10%
Profitability Index = PV of future cash flows / Initial Investment
CDMA G$ Wi-Fi
PV future cash flows $19.11 $52.29 $63.19
Initial investment $5.00 $10.00 $15.00
Profitability ...

Solution Summary

Profitability index versus NPV and comparing investment criteria are examined.

$2.19