Question: Carlyle Chemicals is evaluating a new chemical compound used in
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 cash flows. Specifically, the firm expects the cost per unit (which is currently $0.80) will rise at a 10 percent rate over the next three years. The per-unit selling price is currently $1.00 and this price is expected to rise at a meager 2 percent rate over the next three years. If Carlyle expects to sell 5, 7, and 9 million units for the next three years, respectively, what is your estimate of the gross profits to the firm? Based on these estimates, what recommendation would you offer to the firm’s management with regard to this product?
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