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Xyz company spent 750000 to develop a microchip the company

XYZ Company spent $750,000 to develop a microchip. The company spent an additional $200,000 for marketing. XYZ Company can manufacture the chip for $205 each in variable costs. Fixed costs for the operations are estimated to run $5.1 million per year. The estimated sales volume is $64,000; $106,000; $87,000; $78,000; and $54,000 per year for the next five years respectively. The unit price per chip will be $485. The necessary equipment can be purchased for $34.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $5.5 million. Net working capital for the chip will be 20% of sales and will occur with the timing of the case flows for the year (i.e. there will be no initial outlay for NWC). Changes in NWC will first occur in Year 1 with the first year’s sales. XYZ Company has a 35% tax rate and a required return of 12%.

What is the payback period of the project?

What is the profitability index of the project?

What is the IRR of the project?

What is the NPV of the project?

How sensitive is the NPV to changes in the price of the new chip?

How sensitive is the NPV to changes in the quantity sold?

Should XYZ Company produce the new chip?

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