Volvo is looking to introduce a new “hybrid” car in the US. Their analysts estimate that they will sell 20,000 of these new cars per year. The unit cost per car is $18,000 and they plan on selling the vehicle for $22,000. If the current sales of Volvo’s sedan, which costs $15,000 to produce and sells for $20,000, go down from 25,000 units per year to 18,000 units, is this a worthwhile move for Volvo? Calculate the amount of the erosion cost and the incremental cash flow that will result if they go ahead with the launch.
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