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Consider two mutually exclusive Ramp;D projects that Savage Tech is considering. Assume the discount rate for both projects is 13 percent. Project...
Consider two mutually exclusive R&D projects that Savage Tech is considering. Assume the discount rate for both projects is 13 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 -$745,000 -$954,000
1 348,000 263,000
2 367,000 372,000
3 259,000 368,000
4 184,000 422,000
5 128,000 507,000
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. Enter your answer as a percent and round your answer to 2 decimal places, e.g., 32.16.)
Incremental IRR _________ %