Mike Chang and Joan Brown are tech-entrepreneurs collaborating on 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. They felt that the right strategy would be to sell their product at dirt- cheap prices in initial years 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.

Estimated cash inflows are:

Year	Cash Flows ($)
0	-10,00,000
1	50,000
2	2,00,000
3	6,00,000
4	10,00,000
5	15,00,000

An alternative would be to sell the patent and receive around $200,000 immediately. They plan to invest this money in a new start up to test silicon wafers for chip makers. The life of this project is expected to be only about five years. The 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. They expect profits in the first couple of years after which the advancing technology would make them obsolete. Keeping all this in mind, they estimate the cash flows as follows:

Year	Cash Flows ($)
0	-9,00,000
1	6,50,000
2	6,50,000
3	5,50,000
4	3,00,000
5	1,00,000

Mike and Joan 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. Below are the results of the analysis they have carried out so far:

Metrics	Option 1	Option 2
Payback Period (in years)	3.15	1.38
Discounted Payback Period (in years)	3.98	1.79
Internal Rate of Return (IRR)	35.93%	55.07%
Modified Internal Rate of Return (MIRR)	32.04%	32.84%

If you are the consultant advising Mike and Joan,

a. Compute NPV of both the options.

b. Compute Profitability Index (PI) of both the options.

c. How would you rank the projects based on each of the following metrics: Payback Period, Discounted Payback Period, NPV, IRR, Profitability Index, and MIRR.

d. Is the above ranking same when you use different metrics? Explain your answer very briefly.

e. Which of these projects would you recommend? Explain why.