Question

(Calculating inflation and project cash​ flows) Carlyle Chemicals is evaluating a new chemical compound used in the manufacture of a wide range of consumer products. The firm is concerned that inflation in the cost of raw materials will have an adverse effect on the​ project's cash flows.​ Specifically, the firm expects that the cost per unit​ (which is currently $ 0.86​) will rise at a rate of 13 percent annually over the next three years. The​ per-unit selling price is currently ​$0.96​, and this price is expected to rise at a meager 4 percent annual rate over the next three years. If Carlyle expects to sell 6.5​, 7.5​, and 10 million units for the next three​ years, respectively, what is your estimate of the​ firm's gross​ profits? Based on this​ estimate, what recommendation would you offer to the​ firm's management with regard to this​ product? ​(Note​: Be sure to round each unit price and unit cost per year to the nearest​ cent.)

The gross profit or​ (loss) for year 1 is ​$

The gross profit or​ (loss) for year 2 is ​$

The gross profit or​ (loss) for year 3 is ​$

Answer 1

Gross profit = Sales - Cost of Goods sold
	Year 1	Year 2	Year 3
Selling price per unit	1	1.04	1.08
Cost per unit	0.97	1.1	1.24
Gross Profit per unit	0.03	-0.06	-0.16
Number of units	6,500,000	7,500,000	10,000,000
Gross Profit	195,000	(450,000)	(1,600,000)
The product should not be produced year 2 onwards