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 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 as follows: PATAY2 CHIP PRODUCT ESTIMATES $ 20,000,000 $ Development cost Pilot testing Debug Ramp-up cost Advance marketing Marketing and support cost Unit production cost year 1 Unit production cost year 2 Unit price year 1 Unit price year 2 Sales and production volume year 1 Sales and production volume year 2 Interest rate 5,000,000 3,900,000 $ 3,000,000 24 $ 6,800,000 $ 1,000,000 per year 655.00 $ 545.00 820.00 650.00 250,000 150,000 $ 10 % PATAY2 CHIP PROJECT TIMING PROJECT SCHEDULE YEAR I YEAR 2 YEAR 3 YEAR 4 1ST 2ND IST 2ND IST 2ND IST 2ND PATAY2 CHIP HALF HALF HALF HALF HALF HALF HALF HALF Development Pilot Testing Debug Ramp-up Advance Marketing Marketing and Support Production and Sales Assume all cash flows occur at the end of each period. a. What is the net present value (at the discount rate of 10%) of this project? (Negative value shoulc pe indicated by a minus sign. Enter your answer in thousands of dollars. Round your answer o the nearest thousand.)
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 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 as follows: PATAY2 CHIP PRODUCT ESTIMATES $ 20,000,000 $ Development cost Pilot testing Debug Ramp-up cost Advance marketing Marketing and support cost Unit production cost year 1 Unit production cost year 2 Unit price year 1 Unit price year 2 Sales and production volume year 1 Sales and production volume year 2 Interest rate 5,000,000 3,900,000 $ 3,000,000 24 $ 6,800,000 $ 1,000,000 per year 655.00 $ 545.00 820.00 650.00 250,000 150,000 $ 10 % PATAY2 CHIP PROJECT TIMING PROJECT SCHEDULE YEAR I YEAR 2 YEAR 3 YEAR 4 1ST 2ND IST 2ND IST 2ND IST 2ND PATAY2 CHIP HALF HALF HALF HALF HALF HALF HALF HALF Development Pilot Testing Debug Ramp-up Advance Marketing Marketing and Support Production and Sales Assume all cash flows occur at the end of each period. a. What is the net present value (at the discount rate of 10%) of this project? (Negative value shoulc pe indicated by a minus sign. Enter your answer in thousands of dollars. Round your answer o the nearest thousand.)
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
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Transcribed Image Text: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 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 as
follows:
PATAY2 CHIP PRODUCT ESTIMATES
$
Development cost
Pilot testing
Debug
Ramp-up cost
Advance marketing
Marketing and support cost
Unit production cost year 1
Unit production cost year 2
Unit price year 1
price year 2
Sales and production volume year 1
Sales and production volume year 2
Interest rate
20,000,000
2$
5,000,000
$
3,900,000
$
3,000,000
6,800,000
1,000,000 per year
655.00
545.00
820.00
650.00
250,000
150,000
Unt
2$
10 %
PATAY2 CHIP PROJECT TIMING
PROJECT SCHEDULE
YEAR I
YEAR 2
YEAR 3
YEAR 4
IST
2ND
IST
2ND
IST
2ND
IST
2ND
PATAY2 CHIP
HALF
HALF
HALF
HALF
HALF
HALF
HALF
HALF
Development
Pilot Testing
Debug
Ramp-up
Advance Marketing
Marketing and Support
Production and Sales
Assume all cash flows occur at the end of each period.
a. What is the net present value (at the discount rate of 10%) of this project? (Negative value should
be indicated by a minus sign. Enter your answer in thousands of dollars. Round your answer
to the nearest thousand.)
Transcribed Image Text:Net present value
D. 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). What is the NPV of the project if this
option is implemented? (Negative value should be indicated by a minus sign. Enter your answer
in thousands of dollars. Round your answer to the nearest thousand.)
Net present value
c. If sales are only 200,000 the first year and 100,000 the second year, what would the NPV of the
project be? Assume the development costs and sales price are as originally estimated. (Negative
value should be indicated by a minus sign. Enter your answer in thousands of dollars. Roun
your answer to the nearest thousand.)
Net present value
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