Corporate Finance
Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
Question
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Chapter 5, Problem 15QAP

a.

Summary Introduction

Adequate information:

Discount rate=10%

Cash flows of Technology CDMA in Year 0 = -$18 million

Cash flows of Technology CDMA in Year 1= $23 million

Cash flows of Technology CDMA in Year 2= $16 million

Cash flows of Technology CDMA in Year 3= $6 million

Cash flows of Technology G4 in Year 0 = -$25 million

Cash flows of Technology G4 in Year 1 = $21 million

Cash flows of Technology G4 in Year 2 = $51 million

Cash flows of Technology G4 in Year 3 = $41 million

Cash flows of Technology Wi-Fi in Year 0 = -$43 million

Cash flows of Technology Wi-Fi in Year 1 = $39 million

Cash flows of Technology Wi-Fi in Year 2 = $66 million

Cash flows of Technology Wi-Fi in Year 3= $42 million

To determine: Ranks of technologies based on profitability index decision rule.

Introduction: The profitability index is a budgeting technique that evaluates various investment proposals based on profitability. Other budgeting techniques are NPV, IRR, MIRR, etc.

b.

Summary Introduction

Adequate information:

Discount rate=10%

Cash flows of Technology CDMA in Year 0 =-$18 million

Cash flows of Technology CDMA in Year 1=$23 million

Cash flows of Technology CDMA in Year 2=$16 million

Cash flows of Technology CDMA in Year 3=$6 million

Cash flows of Technology G4 in Year 0 =-$25 million

Cash flows of Technology G4 in Year 1 = $21 million

Cash flows of Technology G4 in Year 2 = $51 million

Cash flows of Technology G4 in Year 3 = $41 million

Cash flows of Technology Wi-Fi in Year 0 = -$43 million

Cash flows of Technology Wi-Fi in Year 1 = $39 million

Cash flows of Technology Wi-Fi in Year 2 = $66 million

Cash flows of Technology Wi-Fi in Year 3=$42 million

To determine: Ranks of technologies based on NPV.

Introduction: NPV is the difference between the aggregate value of cash inflows and the aggregate value of cash outflows.

c.

Summary Introduction

Adequate information:

Discount rate=10%

Cash flows of Technology CDMA in Year 0 =-$18 million

Cash flows of Technology CDMA in Year 1=$23 million

Cash flows of Technology CDMA in Year 2=$16 million

Cash flows of Technology CDMA in Year 3=$6 million

Cash flows of Technology G4 in Year 0 =-$25 million

Cash flows of Technology G4 in Year 1 = $21 million

Cash flows of Technology G4 in Year 2 = $51 million

Cash flows of Technology G4 in Year 3 = $41 million

Cash flows of Technology Wi-Fi in Year 0 = -$43 million

Cash flows of Technology Wi-Fi in Year 1 = $39 million

Cash flows of Technology Wi-Fi in Year 2 = $66 million

Cash flows of Technology Wi-Fi in Year 3=$42 million

To discuss: Recommendation to the CEO based on the above results.

Introduction: The profitability index is a budgeting technique that evaluates various investment proposals based on profitability.

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Corporate Finance

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