This loss in sales is the result of the decision to launch the new machine, hence we have to reflect it in our computation of the incremental net cash flows: The i ncremental revenues of the new machine are only 1.8 million (5 - 3.2). However, the launch of the new machine reduces expected revenues of the old machine by $3.2 million (= 800×4'000). Annual revenues of the new machine are $5 million (=1'000×5'000).The following table details the analysis:
Based on this information, what are the incremental net cash flows of the new drilling machine?.However, the new drilling machine will replace the current model, which was expected to sell 800 units at a price of $4'000 each and a production cost of $2'500 apiece.There is no initial investment required and there are no additional working capital needs due to the project.Costs of goods sold are $2'500 per machine and the tax rate is 20%. The company expects to sell 1'000 such machines per year over the next 2 years at a price of $5'000 each.Super Drill Company is considering launching a new drilling machine for orthopedic surgery: In contrast, negative synergies lower the incremental cash flows and reduce project value. To the extent that these (positive or negative) synergies are triggered by the investment decision under consideration, we have to reflect them when estimating the incremental cash flows: Positive synergies increase the project's incremental cash flows and therefore boost project value. Negative synergies: The investment decision has negative financial effect on other firm activities, for example because it lowers the sales of existing products or triggers additional costs.Positive synergies: The investment decision has positive financial effects on other firm activities, for example because it creates additional sales for these activities or it reduces costs.Very often, the launch of a new product or project affects the revenues and costs of existing products and activities.
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