Question

Consider two mutually exclusive R&D projects that Savage tech is considering. assume the discount rate for both projects is 11 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

O. -$675000. -877000

1. 334,000. 249000

2. 346,000. 351000

3. 252,000. 354000

4. 177000. 401000

5. 114000. 486000

Complete the following table

PROECT A. Project B

NPV

IRR. %. %

PI

What is the increments IRR of investing in the larger project?

Incremental project ......... %

Answer 1

NPV,IRR PI and incremental IRR can be calculated with excel function. The formulas and methods are discussed as follows.

	A	B
Year	Project A	Project B
0	-675000	-877000
1	334000	249000
2	346000	351000
3	252000	354000
4	177000	401000
5	114000	486000
NPV	275231.32	443614.01
Excel Formula	NPV(11%,A1:A5)+A0	NPV(11%,B1:B5)+B1
IRR	29.46%	27.55%
Excel Formula	IRR(A0:A5)	IRR(B0:B5)
PI=(1+NPV/-Investment)	1.41	1.51
Excel Formula	(=1+275231.32/675000)	(=1+443614.01/877000)

	A	B	C
Year	Project A	Project B	Incremental Cash Fow
0	-675000	-877000	-202000
1	334000	249000	-85000
2	346000	351000	5000
3	252000	354000	102000
4	177000	401000	224000
5	114000	486000	372000
		Incremental IRR	24.89%
		Excel Formula	IRR(C0:C5)

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