Question
Consider two mutually exclusive R&D projects that Savage Tech is considering. Assume the discount rate for both projects is 12 percent. Project A: Server CPU
Consider two mutually exclusive R&D projects that Savage Tech is considering. Assume the discount rate for both projects is 12 percent.
Project A: | Server CPU .13 micron processing project |
By shrinking the die size to .13 micron, the company 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 | Project A | Project B | ||||
0 | $ | 685,000 | $ | 888,000 | ||
1 | 336,000 | 251,000 | ||||
2 | 349,000 | 354,000 | ||||
3 | 253,000 | 356,000 | ||||
4 | 178,000 | 404,000 | ||||
5 | 116,000 | 489,000 | ||||
Complete the following table: (Do not round intermediate calculations. Enter the IRR as a percent. Round your profitability index (PI) answers to 3 decimal places, e.g., 32.161, and other answers to 2 decimal places, e.g., 32.16.)
Project A | Project B | ||||||
NPV | $ | $ | |||||
IRR | % | % | |||||
PI | |||||||
What is the incremental IRR of investing in the larger project? (Do not round intermediate calculations. Enter your answer as a percent and round your answer to 2 decimal places, e.g., 32.16.) Incremental IRR %
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