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 $0.84​) will rise at a rate of 12 percent annually over the next three years. The​ per-unit selling price is currently $0.99 and this price is expected to rise at a meager 4 percent annual rate over the next three years. If Carlyle expects to sell 5.5​, 7.5​, and 10 million units for the next three​ years, respectively, what is your estimate of the​ firm's gross​ profits? ​(Round to the nearest​ dollar.)

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.)

Answer 1

Gross Profits
Year	1	2	3
Sales	5.5	7.5	10.0
Unit price	0.99	1.03	1.07
Revenue	5.45	7.72	10.71
Unit cost	0.84	0.94	1.05
Cost of goods sold	4.62	7.06	10.54
Gross Profit	0.83	0.67	0.17
The net margin of this product will decrease with time. It is thus not projected to be very profitable