Reference no: EM131168985
Early 2012, Google decided to purchase Motorola mobility LLC for $12.5b. Google had a plan to keep Motorola mobility for 5 years. Google financial analysis team made the following forecasts:
Motorola Mobility LLC is a company that develops mobile devices. Headquartered in Chicago, Illinois, United States, the company was formed on January 4, 2011 by the split ofMotorola Inc.into two separate companies; Motorola Mobility took on the company's consumer-oriented product lines, including its mobile phone business and its cable modems and set-top boxes for digital cable and satellite television services, while Motorola Solutions retained the company's enterprise-oriented product lines.
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Year
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Cash flow(in billions)
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Net income (in billions)
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2012
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1.5
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1
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2013
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2.5
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2
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2014
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4
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3
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2015
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3
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2
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2016
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6 (includes 3.5b selling price)
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1.5
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And that the average book value of asset is $8b and Google's required rate of return is 11%.
1- Calculate net present value (NPV) for the above investment decision. Would you accept or reject this investment decision? Why?
2- Calculate payback period. If you know that google accepts projects with 4 years payback period. Would you accept that project?
3- Calculate the Motorola project internal rate of return (IRR). Would you accept or reject this project? Why?
4- Calculate the average accounting return (AAR). If you know that the required average accounting return is 25%. Would you accept that project?
5- Calculate profitability index of the above project. Would you accept or reject that deal? Why?
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