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    Cost and Market Factors; Planning and Budgeting: What influence does the law have on pricing decisions and what is DCF?

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    1. Managers should base pricing decisions on both cost and market factors. In addition, they must also consider legal issues. Describe the influence that the law has on pricing decisions.

    2. "It is impossible to use Discounted Cash Flow methods for evaluating investments in research and development. There are no cost savings to measure, and we don't even know what products might come out of our R&D activities." This is a quote from an R&D manager who was asked to justify investment in a major research project based on its expected net present value. How would you respond to this statement? Do you agree or disagree? Explain.

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    Solution Preview

    1. Managers typically make pricing decisions based on cost and market factors. The cost of production, including the fixed cost, the variable cost and total cost influence the prices. Further, the prices charged by competitors play an important role in setting prices. These are the normal means that managers adapt to set prices. In addition, the prices are set to achieve a certain set of objectives. For instance, prices are set with the objective of gaining a market share. Further prices may be set to position a product. For instance, higher prices are set for products that are marketed a premium products.

    The law also has an important effect on pricing. The law forbids ...

    Solution Summary

    This tutorial discusses pricing decisions based on cost and market factors as well as the discounted cash flow method for evaluated the present value of investments in 418 words with seven references.