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# Newport's pricing policy

Assume the same facts as in Newport Lifts (A). Additionally, financial management believes that if it maintains the same yuan sales price, volume will increase at 12% per annum for eight years. Dollar costs will not change. At the end of ten years, Newport Lift's patent expires and it will no longer export to China. After the yuan is devalued to Yuan9.20/\$, no further devaluations are expected. If Newport Lifts raises the yuan price so as to maintain its dollar price, volume will increase at only 1% per annum for eight years, starting from the lower initial base of 9,000 units. Again dollar costs will not change and at the end of eight years, Newport will stop exporting to China. Newport's weighted average cost of capital is 10%. Given these considerations, what should be Newport's pricing policy?

Assumptions Values Assumptions Values
Sales volume per year 10,000 Volume change 1%
US dollar price per unit \$24,000 (if price increased)
Direct costs as % of US\$ price 75% Volume growth 12%
Direct costs per unit \$18,000 (same Rmb price)
Spot exchange rate, yuan/\$ 8.2000 WACC 10%
Expected spot rate, yuan/\$ 9.2000

Alternative 1: Keep Same Chinese Sales Price
Gross Present Value Present Value
Year Volume Revenue Direct Costs Margin Factor of Margin
1
2
3
4
5
6
7
8
Cum PV of Gross Margin

Alternative 2: Raise Chinese Sales Price
Gross Present Value Present Value
Year Volume Revenue Direct Costs Margin Factor of Margin
1
2
3
4
5
6
7
8
Cum PV of Gross Margin

Explain

#### Solution Summary

The solution provides detailed explanations and calculations for the problem.

\$2.19