Moncton Semiconductors Corporation (MSC) is considering spending an additional $4 million to expand its computer chip factory to increase production of its best-selling product. The expansion will begin producing revenue in one year. MSC has already spent $500,000 studying the upgrade. The following data applies:

The fixed costs stem from depreciation expenses and overhead. Overhead will increase by $20,000 per year as a result of the expansion. It is estimated that this expansion will cannibalize some existing sales, resulting in a lost profit contribution of $35,000 per year. Additional working capital of $40,000 will be required if the expansion proceeds.
Required:
(a) Determine the net relevant cash flows for proceeding with the expansion.
(b) Determine the payback period.
(c) Calculate the net present value using a discount rate of 5% and determine if the project should proceed.

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Sale price per chip (5) Estimated unit sales Variable costs per chip (S) Fixed costs ($) Year 1 10 100,000 Year 2 15 125,000 Year 3 25 140,000 Year 4 20 110,000 2.50 200,000 200,000 200,000 200,000