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 |

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