Assessing Inflationary Effects (LO2, 6)

The Nova Products Company wants to launch a new product to replace a current product that is technologically inferior. First-year sales for the replacement product are expected to,be 100,000 units at a unit selling price of $4.00. The initial cost of the product is $3.00 per unit variable and $100,000 fixed. The expected sales growth is 1,000 units per year, and the expected inflation rate is in a range of 4 to 5 percent for both sales and variable costs.

Required

a. Determine the anticipated profit margin for the new product for the first four years assuming:
1. No inflation 2. Inflation at 4 percent

b. Compute the profit margin difference between no inflation and 4 percent inflation. Would this information make a difference in your evaluation of the new product? Explain. LO.1