Techmasters has developed new TPU chips geared toward cloud applications. The initial investment at year 0 is $10 million to buy the equipment necessary to manufacture the chip. Net working capital (NWC) required at the beginning of each year is 10% of the year's projected sales. The chip sells for $240 per unit. Variable cost is $175 per unit. The firm believes it could sell 100,000 units per year. After Year 1, both the sales price and variable costs will increase at the inflation rate of 3%. The companys fixed cost is projected to be $1 million at Year 1 and would increase with inflation.

The TPU chip project would have a life of 4 years. The equipment would be depreciated over a 5-year period, using MACRS rates. The estimated market value of the equipment at the end of the projects 4-year life is $500,000. If the project is undertaken, it must be continued for the entire 4 years. Also, the project's returns are expected to be highly correlated with returns on the firm's other assets. Assume that tax rate is 40% and cost of capital is 10% for average-risk projects, defined as projects with a coefficient of variation of NPV between 0.8 and 1.2. Low-risk projects are evaluated with a WACC of 8%, and high-risk projects at 13%.

Consider the following three scenarios and find the projects risk-adjusted NPV, IRR, and payback period.

Sales Price Unit Sales Variable Costs Scenario Probability Best Case Base Case Worst Case 25% 50% 25% 288 240 192 120,000 100,000 80,000 140 175 210