4. Intel is developing a new computer chip and wants to use the buses made by your

company, Rambus Inc. However, it will take Intel 1-year to develop the chip. If the

market demand for these chips is high (a 75% likelihood}, Intel expects to sell 35

million chips. Unfortunater there is a competing technology currently in the works

that might make this chip obsolete in which case Intel will scrap the chip entirely (i.e.,

sell 0). You are in the business of producing these buses and your cost is $3.50 each

(your production time is 1 year and the entire cost of $3.50 per chip is sunk today).

Because Intel wants to be certain about production costs, Intel wants to set the

delivery price today at $6 per bus. If Intel does not buy the buses (i.e., if the

competing technology succeeds) you will sell them on the open market, but at a low

price of $3 each. If the competing technology does not work, your buses will be in

huge demand and sell for $7 each in the open market. Assume that this risk implies

a discount rate (RADR) of 25%. Intel offers Rambus a fee for entering into this

agreement. How much should Rambus charge Intel for guaranteeing the buses at $6

each? Assume the one-year government bond yield is 6%?