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Part 1

Nirvana Chip Designs has finished designing its next generation of chips, the XJ5000 series and is getting ready to start production. As the analyst on the project, you are required to prepare pro forma free cash flows. Which of the following are relevant to your analysis?

a. Design cost for the chips

b. Potential lost sales of the XJ4000 chips

c. Proportional cost of the corporate jet lease

d. Start-up investment in raw materials

e. Upgrades to the chip fabrication facility required if the chip is produced

f. Market research done to guide the development of the new chip

g. Market value of land and buildings where new chip will be produced

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Part 1

a. Design cost for the chips.(Select the best choice below.)

A.

This is relevant as it represents cannibalization of existing sales.

B.

This is relevant because it is an investment in working capital.

C.

This is irrelevant as it represents existing overhead.

D.

This is irrelevant because it is a sunk cost.