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Pricing Decision and Investment Evaluations

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 decision.

"It is impossible to use DCF (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. How can they justify investing in a major research project based on its expected net present value? Explain how this can be done please, and if you were that manager would you have your resume ready to go out?

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The influence of law on prices can be seen in the following ways -

a. Anti-trust Laws - These check the price that can be charged by the company. If any unfair pricing is indicated then action can be taken against the firm.

b. Regulatory pricing - Many times the government sets the price that can be charged as was the case with electricity regulation.

c. Anti-dumping laws - These laws state that the price cannot be below cost

d. A law which prohibits discrimination in prices between different purchasers ( Robinson-Pitman Act)

The DCF methodology can be applied to R&D activities in 2 ways.

First method applicable to historical costs - the historical costs of R&D can be measured against ...

Solution Summary

The solution explains pricing decisions and how discounted cash flows can be used for R&D in 441 words.