Business, 20.09.2020 09:01 acediego3119
Perot Corporation is developing a new CPU chip based on a new type of technology. Its new chip, the Patay2 chip, will take two years to develop. However, because chip manufacturers will be able to copy the technology, it will have a market life of two years after it is introduced. Perot expects to be able to price the chip higher in the first year, and it anticipates a significant production cost reduction after the first year as well. The relevant information for developing and selling the Patay2 is given below.
Development Cost $20,000,000
Pilot Testing $5,000,000
Debug $3,000,000
Ramp-up Cost $3,000,000
Advance Marketing $5,000,000
Marketing and Support Cost $1,000,000 per year
Unit Production Cost Year 1 $655.00
Unit Production Cost Year 2 $545.00
Unit Price Year 1 $820.00
Unit Price Year 2 $650.00
Sales and Production Volume Year 1 250,000
Sales and Production Volume Year 2 150,000
Interest Rate 10%
Required:
a. What are the yearly cash flows and their present value (discounted at 10 percent) of this project? What is the net present value?
b. Perot's engineers have determined that spending $10 million more on development will allow them to add even more advanced features. Having a more advanced chip will allow them to price the chip $50 higher in both years ($870 for year 1 and $700 for year 2). Is it worth the additional investment?
c. If sales are only 200,000 the first year and 100,000 the second year, would Perot still do the project?
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Perot Corporation is developing a new CPU chip based on a new type of technology. Its new chip, the...
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