Hightech Company designed a new computer chip. Its new chip, the Dolo2 will take 2 years to develop but it will only have a viable market life of two years after it is developed. It will price the chip higher the first year and because it will have to lower the price due to market pressure it is planning on finding new ways to reduce its production costs the second year.

Development costs                 $20,000,000

Pilot testing                             $5,000,000

Debugging                              $3,800,000

Ramp up cost                          $3,000,000

Pre Marketing                         $6,600,000

Marketing and support cost    $1,000,000per year

Unit production cost year1     $655

Unit production cost year2     $545

Unit price year1                      $820

Unit price year2                      $650

Sales&prod volume yr1          250,000

Sales&prod volume yr2          150,000

Interest rate                             10%

Project            year 1                          year 2                          year3                           year4

            Jan-Jun Jul-Dec         Jan-Jun Jul-Dec         Jan-Jun Jul-Dec         Jan-Jun Jul-Dec

a. What are the yearly cash flows and their present value (discounted at the 10% rate of this project? What is the net present value of the project? Note use excel to work these problems.

b. Hightech’s engineers have determined that spending $10,000,000 more on development will allow them to add even more advanced features. Having more advanced features will allow them to price the chip $50 higher in both years 3 and 4.

c. If sales are only 200,000 in year 3 and 100,000 in year 4 would high-tech still do the project?