7. The marketing department now believes that introducing Gigantium would cut into the "sales" of Pentium chips because some of the Gigantium customers would have otherwise purchased Pentium chips. The best estimate by the marketing group is that the amount of lost Pentium sales would be $200 million per year. You also learn that Simtel's market research shows that their competitor AMD is also working on a chip similar to Gigantium but it will take AMD two years to introduce their product. The introduction of the AMD chip will have the same effect on Pentium sales as the introduction of Gigantium (i.e. reduce Pentium sales by $200 million per year). Simtel enjoys an EBIT margin of 25% on Pentium chips. How does this change your NPV analysis? 8. The reduction in Pentium sales would make Simtel's San Mateo plant redundant. Assume all the sales lost ($200 million) are from this plant. The plant has been fully depreciated and can be sold to a potential real estate developer. The net amount from this sale after all taxes are paid is $20 million. If the Gigantium project is not undertaken, the plant would still become redundant after 2 years due to AMD's project launch but it is hard to estimate what price it can be sold for. Management believes that the offer from the real estate company is unlikely to be repeated in two years and thus assumes that this plant would have zero value. How does this affect your estimate of NPV for the Gigantium project? 9. The closure of San Mateo facility would also lead to a reduction in net working capital. Simtel estimates that the total net working capital tied up at the Sam Mateo facility is 15% of the facility's sales. If the plant were closed immediately, assume this net working capital can be recovered fully. If the Gigantium project is not undertaken, the San Mateo plant would still become redundant due to AMD's product launch in two years, but the working capital would be worthless due to obsolete material. How does this change your NPV of Gigantium Project?