and lucy are facing an important d

URGENT PLEASE BEFORE mid night

the two computer engineers felt it was t

next stage - decide which of two possible

Both had a bachelor degree in engineerin

a large chip manufacturing company. Ab

stock options. That was when they decid

starting a venture of their own. In their s

on some research into a new chip that co

this point, the design of the chip was co

performance of their design, any delay in

the established players might introduce a

the time to act if at all.

They estimated that they would need to :

As for future cash flows, they felt that th

their product at dirt-cheap prices in orde:

had established a name for itself, the price

in its current form was likely to be obsolet

and patented could be sold to a larger !

budding entrepreneurs estimated the cash

Project A ( picture )

fernative to pursuing this project would be to immediately sell the patent for their innovative

hip design to one of the established chip makers. They estimated that they would receive around

$200,000 for this. It would probably not be reasonable to expect much more as neither their product

nor their innovative approach had a track record.

invest in some plant and equipment that would test silicon wafers for zircon content

erm

They could the

before the wafers were used to make chips. Too much zircon would affect the long-t

performance of the chips. The task of checking the level of zircon was currently being performed by

chip makers themselves. However, many of them, especially the smaller ones, did not have the

capacity to permit 100% checking. Most tested only a sample of the wafers they received.

Mike and lucy were confident that they could persuade at least some of the chip makers to

outsource this function to them. By exclusively specializing in this task, their little company would be

able to slash costs by more than half, and thus allow the chip manufacturers to go in for 100% quality

check for roughly the same cost as what they were incurring for a partial quality check today. The life

t project B) is expected to be only about five years.

Ali and Fatima are facing an important decision, After having discussed different financial scenarios,

the two computer engineers felt it was time to finalize their cash flow projections and move to the

Next stage - decide which of two possible projects they should undertake,

Both had a bachelor degree in engineering and had put in several years as maintenance engineers in

a large chip manufacturing company. About six months ago, they were able to exercise their first

stock options. That was when they decided to quit their safe, steady job and pursue their dreams of

starting a venture of their own. In their spare time, almost as a hobby, they had been collaborating

on some research into a new chip that could speed up certain specialized tasks by as much as 25%. At

this point, the design of the chip was complete. While further experimentation might improve the

performance of their design, any delay in entering the market now may prove to be costly, as one of

the established players might introduce a similar product of their own. The duo knew that now was

the time to act if at all

They estimated that they would need to spend about $1,000,000 on plant, equipment and supplies.

As for future cash flows, they felt that the right strategy at least for the first year would be to sell

their product at dirt-cheap prices in order to induce customer acceptance. Then, once the product

had established a name for itself, the price could be raised. By the end of the fifth year, their product

in its current form was likely to be obsolete. However, the innovative approach that they had devised

and patented could be sold to a larger chip manufacturer for a decent sum. Accordingly, the two

budding entrepreneurs estimated the cash flows for this project (call it Project A) as follows:

Project A

Year Expected Cash flows ($)

Year 0 (1000000)

year 40000

2nd year 200000

3rd year {500000

4 th year [1000000

5 th year 1300000

fernative to pursuing this project would be to immediately sell the patent for their innovative

hip design to one of the established chip makers. They estimated that they would receive around

$200,000 for this. It would probably not be reasonable to expect much more as neither their product

nor their innovative approach had a track record.

invest in some plant and equipment that would test silicon wafers for zircon content

erm

They could the

before the wafers were used to make chips. Too much zircon would affect the long-t

performance of the chips. The task of checking the level of zircon was currently being performed by

chip makers themselves. However, many of them, especially the smaller ones, did not have the

capacity to permit 100% checking. Most tested only a sample of the wafers they received.

Ali and Fatema were confident that they could persuade at least some of the chip makers to

outsource this function to them. By exclusively specializing in this task, their little company would be

able to slash costs by more than half, and thus allow the chip manufacturers to go in for 100% quality

check for roughly the same cost as what they were incurring for a partial quality check today. The life

t project B) is expected to be only about five years.

of this project too (call

he initial investment for this project is estimated at 1,100,000. After taking into account the sale of

their patent, the net investment would be $900,000. As for the future, Ali and Fatema were pretty

sure that there would be sizable profits in the first couple of years. But thereafter, the zircon content

problem would slowly start to disappear with advancing technology in the wafer industry. Keeping

all this in mind, they estimate the cash flows for this project as follows:

Project B

Year Expected Cash flows ($)

(900000)

1 year 750000

2nd year 600000

3rd year 500000

4th year 400000

5 th year 200000

Ali_ and Fatema now need to make their decision. For purposes of analysis, they plan to use a

required rate of return of 20% for both projects. Ideally, they would prefer that the project they

choose have a payback period of less than 3.5 years and a discounted payback period of less than 4

years.

Evaluate both the projects based on Capital Budgeting techniques and Mention the most feasible

project to invest as per the above mentioned techniques.

1st year Project A Year Expected Cash flows ($) o (1000000 40000 2 nd year 200000 3 rd year 500000 4th year 1000000 5 th year 1300000