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

$ 0.88$0.88​) 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 66​, 6.8, 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.)

NOTE: PLEASE SHOW EVERY STEP

Answer 1

Ans:-

Here, selling price per unit is incresed 4% from $0.96, so it incresed to $0.9984 ,$1.0383 and $1.0799.

Cost pice per unit is increased 13 % from $0.88,so it incresed to $0.9944 ,$1.1237 and $1.2697.

Particulars	Current year	Year 1	Year 2	Year 3
A) Selling price per unit	0.96	1.00	1.04	1.08
B) Cost price per unit	0.88	0.99	1.12	1.27
C) Firms gross profit per unit(A-B)	0.08	0.00	-0.09	-0.19
D) No of units sold		6,60,00,000	68,00,000	1,00,00,000
E) Estimated gross profit (C*D)		$2,64,000	$(5,80,285)	$(18,98,799)
Gross profit in Millions		$0.26	$(0.58)	$(1.90)
Recommendations		Yes	No	No

Hence year1 ended up with profit of $0.26 millions,rest year 2 & 3 ended up with losses.

Firm has to decrese raw material cost by hedging or to check alternative plans.