(Calculating inflation and project cash flows) Carlyle Chemicals is evaluating a

ID: 2787234 • Letter: #

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 14 percent annually over the next three years. The per-unit selling price is currently $0.97, and this price is expected to rise at a meager 1 percent annual rate over the next three years. If Carlyle expects to soll 5.5, 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 is (Round to the nearest dollar.)

Explanation / Answer

Year --->

Cost of raw material per unit

$ 0.98

$ 1.12

$ 1.27

Selling price per unit

$ 1.07

$ 1.17

$ 1.29

No. of units sales

$ 5,500,000

$ 7,600,000

$ 9,600,000

Total sales

$ 5,868,500

$ 8,920,120

$ 12,394,272

Less: raw material

$ 5,392,200

$ 8,494,185.6

$ 12,231,627.26

Gross Profit

$ 476,300

$ 425,934.4

$ 162,644.74

The gross profit for year 1 is $ 476,300. But profit is decreasing as the years are proceeding.

So it is recommended to firm’s manager to increase the product price.