(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 the cost per unit (which is currently $0.90) will rise at a rate of 10 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 1 percent annual rate over the next three years. Carlyle expects to sell 6, 72, and 10 million units for the next three years, respectively. Based on this, Carlyle estimated the gross profits in the table below: The company CFO suggested that they could purchase raw materials in advance for future delivery. This would involve paying for the raw materials today and taking delivery as the materials are needed. Through the advance purchase plan the cost of raw materials would cost $0.99 per unit. How does this new plan affect your cash flow estimates? How should the advance payment for the raw materials enter into your analysis of project cash flows? 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.) How does this new plan affect your cash flow estimates? How should the advance payment for the raw materials enter into your analysis of project cash flows? (Select the best choice below.) O A. All of the raw materials must be paid at t = 0, and it is possible that this acceleration of costs could make the NPV of the prepaid plan lower relative to the initial plan. OB. Since there would be an increase in working capital investment, the company should not go ahead with the project. OC. The gross profit is steadily increasing; therefore, the company should go ahead with the project OD. The raw materials must be paid for as it is used; therefore, the increasingly positive gross profit indicates the Fin Click to select your answer(s). und WE effect on the project's cash flows. Specifically, the firm expects the cost per unit (which is currently $0.90) will rise at a rate of 10 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 1 percent annual rate over the next three years, Carlyle expects to sell 6, 72 and 10 million units for the next three years, tespectively. Based on this, Carlyle estimated the gross profits in the table belcw. m The compa involve paying for Data Table ase plan the cost of low should the advance The gross The grosse The gross Cost per unit Selling price per unit Revenue Variable cost Gross profit Year 1 Year 2 Year 3 $0.99 $1.09 $1.20 $1.00 $1.01 $1.02 $6,000,000.00 $7,272,000.00 $10,200,000.00 $5,940,000.00 $7,848,000.00 $12,000,000.00 $60,000.00 $(576,000,00) $(1.800,000.00) How does into your an senter Ine A Ald the NPV of tt Print Done OB Sind project Oc. The gross profit is steadily increasing therefore, the company should go ahead with the project OD. The raw materials must be paid for as it is used, therefore, the increasingly positive gross profit indicates the Click to select your answer(s) sty W 9 P
