Quick Computing currently sells 17 million computer chips each year at a price o
ID: 2742957 • Letter: Q
Question
Quick Computing currently sells 17 million computer chips each year at a price of $28 per chip. It is about to introduce a new chip, and it forecasts annual sales of 22 million of these improved chips at a price of $35 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 $13 each to manufacture, and the new ones will cost $16 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.) Cash flow $ 208 million??
Explanation / Answer
The proper cash flow to use to evaluate the present value of the introduction of the new chip is the incremental approach.
Incremental approach / analysis
Revenue from New Chip = 22 Million * (35 - 16)
(-) Revenue from Old Chip = 17 Milion * (28 - 13)
418
255
Net Revenue
(-) Decrease in demand of old chip resulting in
revenue loss = 15 Million * (28 - 13)
163
225
Conclusion:- The increase in net revenue as a result of introduction of new chip is negative $ 62 Million.
Particulars Amount (In millions of dollars)Revenue from New Chip = 22 Million * (35 - 16)
(-) Revenue from Old Chip = 17 Milion * (28 - 13)
418
255
Net Revenue
(-) Decrease in demand of old chip resulting in
revenue loss = 15 Million * (28 - 13)
163
225
Net revenue increase as a result of new chip introduction (-) 62Related Questions
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