Quick Computing Company currently sells 10 million computer chips each year at a price of $20.00 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 $25.00 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 $6.00 each to manufacture, and the new ones will cost $8.00 each. What is the proper cash flow to use to evaluate the present value of the introduction of the new chip?
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The proper cash flow to use here is the Incremental Cash Flow, which represent the CHANGE in the firm's total cash flow that happens as a result of undertaking a project.
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