Question

Cash Flows. Quick Computing currently sells 10 million computer chips each year at a price of $20 per chip. It is about to introduce a new chip, and it forecasts annual sales of 12 million of these improved chips at a price of $25 each. However, demand for the old chip will decrease, and sales of the old chip are expected to fall to 3 million per year. The old chips cost $6 each to manufacture, and the new ones will cost $8 each. What is the proper cash flow to use to evaluate the present value of the introduction of the new chip? (LO9-1)

Answer 1

Answer:

Since net revenue has increased from $140 million to $246 million = $106 million by considering all costs thus all the costs and revenue shall be considered.

Explanation:

For calculating the present value, all the cost and revenue will be considered.

Original revenue = Sale of 10 million chips

10 million $\times$ $20 = $200 million

Less: Cost = 10 million $\times$ $6 = $60 million

Net Revenue = $140 million

In case of introducing new chips

Revenue will be as follows

12 million $\times$ $25 + 3 million $\times$ $20

= $300 million + $60 million = $360 million

Less: Costs 12 million $\times$ $8 + 3 million $\times$ $6

= $96 million + $18 million = $114 million

Net Revenue = $360 - 114 = $246 million

Since net revenue has increased from $140 million to $246 million = $106 million by considering all costs thus all the costs and revenue shall be considered.