2 Perot Corporation is developing a new CPU chip based on a new type of technology. Their new chip, the Patay2 chip, will take 2 years to develop. However, because chip manufacturers will be able to copy the technology it will have a market life of 2 years after it is introduced. Perot expects to be able to price the chip higher in the first year and they anticipate a significant pro- duction cost reduction after the first year as well. The relevant information for developing and selling the Patay2 is given below.

a. What are the yearly cash flows and their present value (discounted at 10%) of this project? What is the net present value?

b. Perot's engineers have determined that if they spend $10 million more on development it 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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PATAY2 CHIP PRODUCT ESTIMATES Development Cost Pilot Testing Debug Ramp-up Cost $20,000,000 $5,000,000 $3,000,000 $3,000,000 Advance Marketing Marketing and Support Cost Unit Production Cost Year 1 $5,000,000 $1,000,000 per year $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 Interest rate 150,000 10%