Explore BrainMass
Share

# Cash Flows

I basically understand how to calculate this problem so far, see attachment, however, the last part is as follows:

New chips:

Selling price= \$25
Cost price= \$8
Margin \$17 =25-8

How would calculate the No of chips?
What would be the net cash flow from the sale of new chips?

Please be informative with a complete break down on how to calculate these numbers.

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 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 chip costs \$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?

Solution
Old situation

Old chips:

Selling price= \$20
Cost price= \$6
Margin \$14 =20-6

No of chips= 10 million

Net cash flow= \$140 million =14*10

New situation:

Old chips:

Selling price= \$20
Cost price= \$6
Margin \$14 =20-6

No of chips= 3 million
Net cash flow from the sale of old chips= \$42 million =14*3

New chips:

Selling price= \$25
Cost price= \$8
Margin \$17 =25-8

#### Solution Preview

The cash flow from the sale of new chips would be the net cash flow from the sale of new chips and the loss due to reduction in the sale of old chips.
Net Cash Flow = Cash Flow from New Chips - Loss of Cash Flow from old chips

The sale of old chips will reduce by 7 ...

#### Solution Summary

The solution explains how to calculate the proper cash flow when a new product results in decrease in sales of the earlier product.

\$2.19