7. The Ajax Chemical Company produces specialty chemicals for healthcare provide

Question

7. The Ajax Chemical Company produces specialty chemicals for healthcare providers. During 2017, 100,000 gallons of a particular chemical were produced and sold for $200 per gallon. The cost of producing and selling the chemical was $80 per gallon in 2017. The cost to produce the chemical, measured in 2017 dollars, decreases at a rate of 8% per year and the actual selling price for the chemical decreases at a rate of 5% per year. The number of gallons sold increases by 6% per year. Defining the end of 2017 as the present, what will be the present worth of the profits for chemicals produced and sold in for years 2017 through 2023 if inflation averages 4% per year and the chemical company has a real required return on investment of 7%? (15 pts)

Explanation / Answer

given cost and price are real amounts, not adjusted for inflation as present value is also calculated with real discount rate.

Year 2017 Year 2018 Year 2019 Year 2020 Year 2021 Year 2022 Year 2023 Units sold 1,00,000.00 1,06,000.00 1,12,360.00 1,19,101.60 1,26,247.70 1,33,822.56 1,41,851.91 Real price 200.00 190.00 180.50 171.48 162.90 154.76 147.02 Cost 80.00 73.60 67.71 62.30 57.31 52.73 48.51 Profit per unit 120.00 116.40 112.79 109.18 105.59 102.03 98.51 Net profit 1,20,00,000.00 1,23,38,400.00 1,26,72,859.68 1,30,03,507.92 1,33,30,470.64 1,36,53,870.82 1,39,73,828.66 Discount factor@7% 0.934579 0.873439 0.816298 0.762895 0.712986 0.666342 0.622750 Present value 1,12,14,953.27 1,07,76,836.40 1,03,44,828.45 99,20,313.93 95,04,441.33 90,98,150.65 87,02,198.19 Present worth 6,95,61,722.23

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