Problem:
A computer chip manufacturer is selling 10 million chips per year priced at $10 each. It is about to introduce a new chip that will be priced at $15 each and it expects to sell 16 million. However, demand for the old chips will fall and sales of the old chips are expected to fall to 5 million per year. The old chip costs $7.50 each to manufacture and the new ones will cost $9 each.
Required:
Question: What is the correct cash flow to use to evaluate the present value of the introduction of the new chip? Show all work for full rating.
Note: Provide specific examples to support your answers.