Quick Computing currently sells 16 million computer chips each year at a price of $24 per chip. It is about to introduce a new chip, and it forecasts annual sales of 17 million of these improved chips at a price of $30 each. However, demand for the old chip will decrease, and sales of the old chip are expected to fall to 5 million per year. The old chips cost $9 each to manufacture, and the new ones will cost $12 each. What is the proper cash flow to use to evaluate the present value of the introduction of the new chip

Question

contestada

Respuesta :

abiolataiwo2015 abiolataiwo2015 · Answer 1 · 2021-03-24T04:54:11+01:00

Answer:

$102 million

Explanation:

Calculation to determine the proper cash flow to use to evaluate the present value of the introduction of the new chip

First step is to calculate the Revenue from new chip

Revenue from new chip = 17 million * $30

Revenue from new chip= $510 million

Second step is to calculate the Cost of new chip

Cost of new chip = 17 million * $12

Cost of new chip= $204 million

Third step is to calculate the Revenue lost from old chip

Revenue lost from old chip = (16 million-5 million)*$24 per chip

Revenue lost from old chip =11 million * $24

Revenue lost from old chip= $264 million

Fourth step is to calculate the Costs saved from old chip =

Costs saved from old chip = 5 million per year*12

Costs saved from old chip =$60 million

Now let calculate proper cash flow to use to evaluate the present value of the introduction of the new chip

Increase in cash flow = ($510 million- $204 million) - ($264 million - $60 million) = 118

Increase in cash flow = $306 million-$204 million

Increase in cash flow = $102 million

Therefore the proper cash flow to use to evaluate the present value of the introduction of the new chip is $102 million.