Question

Quick Computing currently sells 9 million computer chips each year at a price of $11 per chip. It is about to introduce a new chip, and it forecasts annual sales of 27 million of these improved chips at a price of $14 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 chips cost $6 each to manufacture, and the new ones will cost $10 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.)

Answer 1

Answer:

overall effect for the first year will be an increase of 94 millions in the cash flow.

Explanation:

The chip will provide:

27 million x $ (14 - 10) each = 104 millions of gross profit

But, decreases gross profit from older chip at rate of:

2 million x $ (11 - 6) each = 10 millions per year

The Chip will generate 104 gross profit but reduce other chip division profit by 10 million

overall effect for the first year will be of 94 millions postive