Quick Computing currently sells 16 million computer chips each year at a price o
ID: 2709128 • Letter: Q
Question
Quick Computing currently sells 16 million computer chips each year at a price of $30 per chip. It is about to introduce a new chip, and it forecasts annual sales of 18 million of these improved chips at a price of $38 each. However, demand for the old chip will decrease, and sales of the old chip are expected to fall to 2 million per year. The old chip costs $15 each to manufacture, and the new ones will cost $18 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.)
Quick Computing currently sells 16 million computer chips each year at a price of $30 per chip. It is about to introduce a new chip, and it forecasts annual sales of 18 million of these improved chips at a price of $38 each. However, demand for the old chip will decrease, and sales of the old chip are expected to fall to 2 million per year. The old chip costs $15 each to manufacture, and the new ones will cost $18 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.)
Explanation / Answer
Gross revenues from new chip =18M*38=$684 million
Cost of new chip =18M*18=$324 millions
lost sales of old chip=14M*30=$420million
Saved costs of old chip=14M*15=$210million
Increase in cash flow= (684-324)-(420-210)=$150Million
cash flow for 1st year=$150million
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