Question

Quick Computing currently sells 7 million computer chips each year at a price of $12 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 $15 each. However, demand for the old chip will decrease, and sales of the old chip are expected to fall to 1 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.)

A. $63 million

B. $65 million

C. $66 million

D. $68 million

Answer 1

The cash flow to evaluate the introduction of the new chip, considering additional revenue and manufacturing costs for new chips only, is $110 million. This calculation does not match the given answer choices, suggesting an error in the question or answer options.

Step-by-step explanation:

To calculate the proper cash flow for evaluating the present value of introducing the new chip, we need to consider both the additional revenue from the new chip sales and the decrease in revenue from the old chip sales. The revenue from the new chip sales is calculated as 22 million chips multiplied by the price of $15 per chip, and the cost of manufacturing is 22 million chips multiplied by the cost of $10 each. The decrease in revenue from the old chips is calculated by taking the difference in sales volume from 7 million down to 1 million, multiplied by the price of the old chip, $12, and then accounting for the manufacturing cost of the old chips, which is 1 million chips at $6 each.

Now let's compute the numbers: The revenue for the new chips is 22 million × $15 = $330 million, and the cost of manufacturing them is 22 million × $10 = $220 million. For the old chips, the lost revenue due to decreased sales is (7 million - 1 million) × $12 = $72 million, and the saved cost from manufacturing fewer old chips is (7 million - 1 million) × $6 = $36 million. Therefore, the proper cash flow for the new chip introduction is ($330 million - $220 million) + ($72 million - $36 million), which equals $146 million in total change in cash flow.

Since the question is asking for the cash flow figure that helps to evaluate the present value, we should not include the decrease in revenue from the old chips as it does not impact the cash flow for the evaluation of the new chip. So, we use only the cash flow from the new chips introduction, which is $330 million (revenue) - $220 million (cost) = $110 million.

However, this figure does not match any of the provided answer choices (A. $63 million; B. $65 million; C. $66 million; D. $68 million). There may be an error in the question or the answer choices given. Based on the provided information and the typical approach to cash flow analysis, the cash flow from introducing the new chip should be $110 million, assuming no other costs (such as research and development, marketing, etc) have been left out.