Perot Corporation is developing a new CPU chip based on a new type of technology. Its new chip, the Patay

$2$

$$chip$,$ will take two years to develop. However, because other chip manufacturers will be able to copy the technology, it will have a market life of two years after it is introduced. Perot expects to be able to price the chip higher in the first year, and it anticipates a significant production cost reduction after the first year as well. The relevant information for developing and selling the Patay

$2$

$$is given as follows:

PATAY

$2$

$$CHIP PRODUCT ESTIMATES

Development cost $

$2$

$0$

$,$

$0$

$0$

$0$

$,$

$0$

$0$

$0$

$$

Pilot testing $

$5$

$,$

$0$

$0$

$0$

$,$

$0$

$0$

$0$

$$

Debug $

$2$

$,$

$6$

$0$

$0$

$,$

$0$

$0$

$0$

$$

Ramp

$-$

up cost $

$3$

$,$

$0$

$0$

$0$

$,$

$0$

$0$

$0$

$$

Advance marketing $

$4$

$,$

$2$

$0$

$0$

$,$

$0$

$0$

$0$

$$

Marketing and support cost $

$1$

$,$

$0$

$0$

$0$

$,$

$0$

$0$

$0$

$$per year

Unit production cost year

$1$

$$$

$6$

$5$

$5$

$.$

$0$

$0$

$$

Unit production cost year

$2$

$$$

$5$

$4$

$5$

$.$

$0$

$0$

$$

Unit price year

$1$

$$$

$8$

$2$

$0$

$.$

$0$

$0$

$$

Unit price year

$2$

$$$

$6$

$5$

$0$

$.$

$0$

$0$

$$

Sales and production volume year

$1$

$2$

$5$

$0$

$,$

$0$

$0$

$0$

$$

Sales and production volume year

$2$

$1$

$5$

$0$

$,$

$0$

$0$

$0$

$$

Interest rate

$1$

$0$

$\%$

Assume all cash flows occur at the end of each period.

a

$.$

$$What is the net present value

$($

at the discount rate of

$1$

$0$

$\%$

$)$

$$of this project?

$($

Negative value should be indicated by a minus sign. Enter your answer in thousands of dollars. Round your answer to the nearest thousand.

$)$

b

$.$

$$Perot

$$

s engineers have determined that spending $

$1$

$0$

$$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 $

$5$

$0$

$$higher in both years

$($

$

$8$

$7$

$0$

$$for year

$1$

$$and $

$7$

$0$

$0$

$$for year

$2$

$)$

$.$

$$What is the NPV of the project if this option is implemented?

$($

Negative value should be indicated by a minus sign. Enter your answer in thousands of dollars. Round your answer to the nearest thousand.

$)$

c

$.$

$$If sales are only

$2$

$0$

$0$

$,$

$0$

$0$

$0$

$$the first year and

$1$

$0$

$0$

$,$

$0$

$0$

$0$

$$the second year, what would the NPV of the project be

$?$

$$Assume the development costs and sales price are as originally estimated.