Question - 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 percent. Further, Hanmi Group has only S45 million to invest in new projects this year.
|
Year
|
Cash Flows (in $ millions)
|
|
CDMA
|
G4
|
WI-FI
|
|
0
|
-$15
|
-$30
|
$-45
|
|
1
|
32
|
28
|
40
|
|
2
|
20
|
70
|
80
|
|
3
|
8
|
60
|
100
|
Required -
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?