Pricing decisions and DCF methods
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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 DCF 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 Summary
This discusses the pricing decisions on both cost and market factors, and also discusses the DCF methods.
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I. The influence of law on prices can be seen in the following ways -
Prices are the direct, internal, variable, perceived costs involved in consuming a good, that is, the factors that directly affect decisions by individual people and organizations (called firms) concerning what goods and services to consume. Thus Pricing is deciding the consideration that customer has to pay in lieu of the organization's goods and/ or services. It means deciding the right price which consumer has to pay including discount structure. But some times Prices can be regulated by the law like:
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)
Thus Government can regulate the prices by above mechanism.
"It is impossible to use DCF methods for evaluating investments in research and development. There are no cost savings to measure, and we ...
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