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 other 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 i rst year, and it anticipates a signii cant production cost reduction after the i rst year as well. The relevant information for developing and selling the Patay2 is given below. Patay2 Chip Product EstimatesDevelopment Cost $20,000,000Pilot Testing $5,000,000Debug $3,000,000Ramp-up Cost $3,000,000Advance Marketing $5,000,000Marketing and Support Cost $1,000,000 per yearUnit Production Cost Year 1 $655.00Unit Production Cost Year 2 $545.00Unit Price Year 1 $820.00Unit Price Year 2 $650.00Sales and Production Volume Year 1 250,000Sales and Production Volume Year 2 150,000Interest Rate 10% a. What are the yearly cash l ows 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 i rst year and 100,000 the second year, would Perot still do the project?
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 other 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 i rst year, and it anticipates a signii cant production cost reduction after the i rst year as well. The relevant information for developing and selling the Patay2 is given below. Patay2 Chip Product EstimatesDevelopment Cost $20,000,000Pilot Testing $5,000,000Debug $3,000,000Ramp-up Cost $3,000,000Advance Marketing $5,000,000Marketing and Support Cost $1,000,000 per yearUnit Production Cost Year 1 $655.00Unit Production Cost Year 2 $545.00Unit Price Year 1 $820.00Unit Price Year 2 $650.00Sales and Production Volume Year 1 250,000Sales and Production Volume Year 2 150,000Interest Rate 10% a. What are the yearly cash l ows 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 i rst year and 100,000 the second year, would Perot still do the project?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
100%
| 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 other 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 i rst year, and it anticipates a signii cant production cost reduction after the i rst year as well. The relevant information for developing and selling the Patay2 is given below. Patay2 Chip Product Estimates 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% a. What are the yearly cash l ows and their present value (discounted at 10 percent) of this project? What is the 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 i rst year and 100,000 the second year, would Perot still do the project? |
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 8 steps with 6 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education