Question
Your company currently sells 11 million bike tires each year at a price of $18 per tire. It is about to introduce a new tire,
Your company currently sells 11 million bike tires each year at a price of $18 per tire. It is about to introduce a new tire, and it forecasts annual sales of 18 million of these improved tires at a price of $24 each. However, demand for the old tire will decrease, and sales of the old tire are expected to fall to 4 million per year (note, this says "fall TO 4 million per year," not "fall BY."). The old tire costs $5 each to manufacture, and the new ones will cost $8 each to make. What is the proper annual cash flow to use to evaluate the present value of the introduction of the new tire? (Hint: Realized cash inflows from new tire sales minus unrealized cash inflows from old tire sales.) You may ignore any effect from taxes (or assume the corporate tax rate is 0). Answer in $MILLION but without the dollar sign (e.g., "10.2" means $10.2 million dollars)
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