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 13 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 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.)

Since the gross profits are steadily  

Decreasing Carlyle needs to decrease the rate of growth in cost  and/or decrease the rate of growth in price

Answer 1

CALCULATION OF GROSS PROFIT IN YEAR 1

A	Sales quantity in year1	5,500,000
B	Per unit Selling Price in Year 1	$                   1.03	(0.99*1.04)
C=A*B	Sales Revenue in year 1	$        5,662,800
D	Cost per unit in year1	$                   1.02	(0.90*1.13)
E=A*D	Total Cost	$        5,593,500
F=C-E	Gross Profit in year1	$              69,300

CALCULATION OF GROSS PROFIT IN YEAR 2

A	Sales quantity in year2	7,500,000
B	Per unit Selling Price in Year 2	$                   1.07	(First year selling price)*1.04)
C=A*B	Sales Revenue in year 2	$        8,030,880
D	Cost per unit in year2	$                   1.15	(First year cost)*1.13)
E=A*D	Total Cost	$        8,619,075
F=C-E	Gross Profit in year2	$         (588,195)

CALCULATION OF GROSS PROFIT IN YEAR 3

A	Sales quantity in year3	9,500,000
B	Per unit Selling Price in Year 3	$                   1.11	(Second year selling price)*1.04)
C=A*B	Sales Revenue in year 3	$      10,579,346
D	Cost per unit in year3	$                   1.30	(Seconf year cost)*1.13)
E=A*D	Total Cost	$      12,336,769
F=C-E	Gross Profit in year3	$      (1,757,423)

Since the gross profits are steadily  

Decreasing Carlyle needs to decrease the rate of growth in cost  and/or INCREASE the rate of growth in price

Sales Quantity is growing . In order to increase profit Carlyle needs to have the growth rate of per unit cost equal to grow rate in per unit sales price.

To achieve this, the growth rate in sales price needs to increase and/or growth rate in per unit cost needs to decrease