Perot Corporation is developing a new CPU chip based on a new type of technology. Its new chip, the Patay2 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. The relevant information for developing and selling the Patay2 is given as follows: PATAY2 CHIP PRODUCT ESTIMATES Development cost Pilot testing Debug Ramp-up cost Advance marketing $27,600,000 $6,900,000 $4,140,000 $4,140,000 $6,900,000 $1,380,000 per year $655.00 $545.00 $820.00 $650.00 288,000 188,000 Marketing and support cost Unit production cost year 1 Unit production cost year 2 Unit price year 1 Unit price year 2 Sales and production volume year 1 Sales and production volume year 2 Interest rate 10%/nProject Schedule Patay2 Chip Development Pilot testing Debug Ramp-up Advance marketing Marketing and support Production and sales Patay2 Chip Project Timing Year 1 Year 2 1st half 2nd 1st half half 2nd half Year 3 1st half Year 4 1st 2nd half 2nd half half/nAssume all cash flows occur at the end of each period. a. What are the yearly cash flows and their present value (discounted at 10 percent) of this project? What is the net present value? Note: Enter your answer in thousands of dollars. Perform all calculations using Excel. Do not round any intermediate calculations. Negative value should be indicated by a minus sign. b. Perot's engineers have determined that spending $10 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 $50 higher in both years ($870 for year 1 and $700 for year 2). What is the NPV of the project if this option is implemented? Note: Enter your answer in thousands of dollars. Perform all calculations using Excel. Do not round any intermediate calculations. Negative value should be indicated by a minus sign. c. If sales are only 276,000 the first year and 138,000 the second year, what would the NPV of the project be? Assume the development costs and sales price are as originally estimated.