Problem 7-22 Comparing Investment Criteria

Consider two mutually exclusive R&D projects that Savage Tech is considering. Assume the discount rate for both projects is 12 percent.

Project A:	Server CPU .13 micron processing project
	By shrinking the die size to .13 micron, the company will be able to offer server CPU chips with lower power consumption and heat generation, meaning faster CPUs.

Project B:	New telecom chip project
	Entry into this industry will require introduction of a new chip for cell phones. The know-how will require a large amount of up-front capital, but success of the project will lead to large cash flows later on.

Year	Project A			Project B
0	$	685,000		$	888,000
1		336,000			251,000
2		349,000			354,000
3		253,000			356,000
4		178,000			404,000
5		116,000			489,000

Complete the following table: (Do not round intermediate calculations. Enter the IRR as a percent. Round your profitability index (PI) answers to 3 decimal places, e.g., 32.161, and other answers to 2 decimal places, e.g., 32.16.)

	Project A		Project B
NPV
IRR		%		%
PI

What is the incremental IRR of investing in the larger project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Incremental IRR

%