Quick Computing currently sells 1000 computer chips per year at a gross profit of $15 per chip. They have the opportunity to buy new equipment that will produce chips that will have a gross profit of $18 each. A marketing consultant who was paid $20,000 forecasts sales of the new improved chips to be 1200 chips per year. However, demand for the old chip will decrease and they estimate they will only be able to sell 700 of the old chips once the new chips are introduced. The overhead allocation is $1 per chip. The new equipment will cost $200,000 and will be depreciated to zero over a 4 year life. All other cash flows are the same with or without the new equipment. Quick Computing has a marginal tax rate of 30%.
a) What is the per year cash flow that should be used to calculate the Net Present Value of the new equipment?
b) If the appropriate Opportunity Cost of Capital is 12%, should Quick Computing adopt this project?