Quick Computing currently sells 12 million computer chips each year at a price of $16 per chip. It is about to introduce a new chip, and it forecasts annual sales of 25 million of these improved chips at a price of $20 each. However, demand for the old chip will decrease, and sales of the old chip are expected to fall to 8 million per year. The old chips cost $8 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? (Enter your answer in millions.)
Calculation of proper cash flow to use to evaluate the present value of the introduction of new chip | ||||||||
$ in million | ||||||||
Sales revenue from new chip | 25*$20 | $500.00 | ||||||
Less: Loss of sale of old chip | 8*16 | $128.00 | ||||||
Add: Savings in cost of old chip | 8*8 | $64.00 | ||||||
Less:Cost of new chip | 25*12 | $300.00 | ||||||
Cash flow to be considered for NPV | $136.00 | |||||||
The loss of sale of old chip is cost for the company and so would be reduce from the sale of new chip, also since there would be no sale the cost of old chip would also reduce which would increase the cash flow | ||||||||
Therefore proper cash flow used to evaluate the present value of the introduction of the new chip is $136 million | ||||||||
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