Problem
Martin Corporation is evaluating a new pharma 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 that 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 Martin expects to sell 5, 7, and 9 million units for the next 3 years, respectively,
i. What is your estimate of the firm's gross profits?
ii. Based on this estimate, what recommendation would you offer to the firm's management with regard to this product?