Chapter 9, Problem 1QP

Summary Introduction

To determine: The cash flow to use for determining the present value.

Explanation of Solution

Computation of cash flow:

$\begin{array}{c}\text{Gross revenue (new chip)}=\text{12 million}\times \text{\$25}\\ =\text{\$300 million}\end{array}$

$\begin{array}{c}\text{Cost of new chip}=\text{12 million}\times \text{\$8}\\ =\text{\$96 million}\end{array}$

$\begin{array}{c}\text{Lost sales of old chip}=\text{7 million}\times \text{\$20}\\ =\text{\$140 million}\end{array}$

$\begin{array}{c}\text{Saved cost of old chip}=\text{7 million}\times \text{\$6}\\ =\text{\$42 million}\end{array}$

$\begin{array}{c}\text{Increase in cash flow}=\left(\$300-\$96\right)-\left(\$140-\$42\right)\\ =\$106\text{ million}\end{array}$