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Consider two mutually exclusive R&D projects that Savage Tech is considering. Assume the discount rate for both projects is 8 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 8 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 | $ | 755,000 | $ | 965,000 | ||
1 | 350,000 | 265,000 | ||||
2 | 370,000 | 375,000 | ||||
3 | 260,000 | 370,000 | ||||
4 | 185,000 | 423,000 | ||||
5 | 130,000 | 510,000 | ||||
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.) |
What is the incremental IRR of investing in the larger project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
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