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 $0.90​) will rise at a rate of 15 percent annually over the next three years. The​ per-unit selling price is currently $1.01​,and this price is expected to rise at a meager 1 percent annual rate over the next three years. If Carlyle expects to sell 6,7.5​, and 9.5 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 (Round to the nearest​ dollar.)

The gross profit or  (loss) for year 2 is (Round to the nearest  dollar.)

The gross profit or  (loss) for year 3 is  (Round to the nearest  dollar.)

Answer 1

	Year	0	1	2	3
a)	Unit sales		6,000,000	7,500,000	9,500,000
b)	Sale price per unit		1.0201	1.030301	1.04060401
c)	revenue (a*b)		6120600	7727257.5	9885738.095
d)	variable cost per unit		1.035	1.19025	1.2021525
e)	Total variable cost (a*d)		6210000	8926875	11420448.75
f)	Gross profit (c-e)		-89400	-1199617.5	-1534710.655
	Recommendation	Since the cashflows are negative,firm should not undertake this project
	Note
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