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    Capital Budgeting: Cash Flow

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    1) PROPER 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 forcasts 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 chip costs $6 each tomanufacture and the new ones will costs $8 each. What is the proper cash flow to use to evaluate the present value of the introduction of the new chip?

    2) INCREMENTAL CASH FLOWS: A corporation donates a valuable painting from its private collection to an art museum. Which of the following are incremental cash flows associated with the donation?

    a. The price the firm paid for the painting.
    b. The current market value of the painting.
    c. The deduction from income tax that it declares for its charitable gift.
    d. The reduction in taxes due to its declared tax deduction.

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    Solution Summary

    The solution
    1) calculates cash flows for evaluating the present value of the introduction of the new chip
    2) indicates incremental cash flows associated with the donation of a valuable painting from the private collection of a corporation to an art museum.