Consider two mutually exclusive R&D projects that ADM is considering. Assume the discount rate for ADM is fifteen percent.

Project A: Server CPU .13 micron processing project. By shrinking the die size to .13 micron, ADM will be able to offer server CPU chips with lower power consumption and heat generation, meaning faster CPUs.

Project B: New telecom chip project. Entry into this industry will require introduction of a new chip for cell phones. The know-how will require a large amount of up-front capital, but success of the project will lead to large cash flows later on.

Year	A	B
0	-$650,000	-$975,000
1	320,000	260,000
2	320,000	350,000
3	230,000	360,000
4	175,000	400,000
5	120,000	500,000

Requirements of the Assignment

1. Using either a spreadsheet or a financial calculator, compute the NPV and IRR of each project. Round NPV to the nearest dollar and IRR to the nearest tenth of a percent. If using NPV, which project should be accepted? If using IRR, which project should be accepted?

2. What two patterns in cash flows have caused a conflict in your choices?

3. Compute the incremental cash flows of Project B over A and then compute your incremental IRR and NPV. What conclusion can be formed from these calculations?

Complete your work in a Word or Excel document. Show your work wherever possible. If you use a financial calculator to solve these problems, note your keystrokes. If you use the spreadsheet to solve these problems, leave your commands or equations in the spreadsheet cells.