Quick Computing: What is the proper cash flow to evaluate a new chip?
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Proper Cash Flows
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?
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Solution Summary
In two paragraphs the solution explains which method to use and calculates the value to be used in considering the project.
Solution Preview
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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