Perot Corporation is developing a new CPU chip based on a new type of technology. Its new
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Patay2 Chip Product Estimates
Development Cost ........ $ 20,000,000
Pilot Testing............ $ 5,000,000
Debug.............. $ 3,000,000
Ramp- up Cost........... $ 3,000,000
Advance Marketing........ $ 5,000,000
Marketing and Support Cost..... $ 1,000,000 per year
Unit Production Cost Year 1 .... $ 655.00
Unit Production Cost Year 2.... $ 545.00
Unit Price Year 1 ......... $ 820.00
Unit Price Year 2.......... $ 650.00
Sales and Production Volume Year 1 ...... 250,000
Sales and Production Volume Year 2 ..... 150,000
Interest Rate.............. 10%
a. What are the yearly cash flows and their present value (discounted at 10 percent) of this project? What is the net present value?
b. Perots engineers have determined that spending $ 10 million more on development will allow them to add even more advanced features. Having a more advanced chip will allow them to price the chip $ 50 higher in both years ($ 870 for year 1 and $ 700 for year 2). Is it worth the additional investment?
c. If sales are only 200,000 the first year and 100,000 the second year, would Perot still do theproject?
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Related Book For
Operations and Supply Chain Management
ISBN: 978-0078024023
14th edition
Authors: F. Robert Jacobs, Richard Chase
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