Purchase Solution

Analysing price decissions

Not what you're looking for?

Ask Custom Question

If the Rhine Company ignores the possibility that other firms may enter its market, it should set a price of $10,000 for its product, which is a power tool. But, if it does so, other firms will begin to enter the market. During the next two years, it will earn $4 million per year, but in the following the next two years, it will earn $1 million per year. On the other hand, if it sets a price of $7,000, it will earn $2.5 million in each of the next four years, since no entrants will appears.

a. If the interest rate is 10 percent, should the Rhine Company set a price of $7,000 or $10,000? Why? (Consider only the next four years)

b. If the interest rate is 8 percent, should the Rhine Company set a price of $7,000 or $10,000? Why? (Consider only the next four years)

c. The results in parts a and b pertain to only the next four years. How can the firm's manager extend the planning horizon?

Purchase this Solution
Solution Summary

Solution describes the steps involved in deciding whether lower or higher price should be choosen based upon NPV method.

Solution Preview

Please refer attached solution for better clarity of tables and formulas in the cells.

Solution:

a. If the interest rate is 10 percent, should the Rhine Company set a price of $7,000 or $10,000? Why? (Consider only the next four years)

Let us calculate Present Value of Profits coming in next four years based upon 10% discount rate.
PV=Future Value/ (1+r) ^n
r = interest rate/discount rate per period.
n = no. of periods

Year End Case A Case B
Price = 10000 Price = 7000
Profit PV@10% Profit PV@10%
1 4 4/(1+0.1)^1=3.6364 2.5 2.5/(1+0.1)^1=2.2727
2 4 4/(1+0.1)^2=3.3058 2.5 2.5/(1+0.1)^2=2.0661
3 1 1/(1+0.1)^3=0.7513 2.5 2.5/(1+0.1)^3=1.8783
4 1 1/(1+0.1)^4=0.6830 ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
Recent Feedback
  • "Thank you"
  • "Really great step by step solution"
  • "I had tried another service before Brain Mass and they pale in comparison. This was perfect."
  • "Thanks Again! This is totally a great service!"
  • "Thank you so much for your help!"
Purchase this Solution
Free BrainMass Quizzes
Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

View More Free Quizzes
Related BrainMass Solutions

  • Data Analysis : Null Hypotheses and Normal Distribution

    A 7.80 8.00 7.98 8.20 8.00 7.99 8.10 7.90 B 8.01 7.75 8.00 7.77 8.01 8.01 8.12 8.20 C 8.10 7.92 8.01 7.88 8.30 8.22 8.56 8.10 Discuss ways of analysing this data from the point of view of having a standard price for petrol in the EU.

  • Circuit Analysis of Opto Coupler Circuits.

    448418 2 questions and solutions based on analysing given opto coupler, led circuits to find voltage drops, current flows, resistances etc. 2 questions and solutions based on analysing given opto coupler, led circuits to find voltage drops, current flows

  • Regression Equation: Elasticity of Demand, Demand Estimation

    Your answer should also include a discussion of the managerial decisions that could be made by analysing elasticity of demand The solution file is attached. Complete, Neat and Step-by-step Solutions are provided in the attached file.

  • vatiance analysis, merits and errors in variance analysis

    Error in analysing the variance Error in setting up the standard data: Standard has to be set up after an analysing the system more scientifically.

  • Capital Budgeting for a new computerized assembly line

    Before analysing whether B&M's Company should pay for the new assembly line, please determine which of the following items are incremental cash flows that should be incorporated into a NPV calculation.

  • Human resources

    26587 Human resources When analysing a companies human resources, What are the main areas you would look at? Thanks Mick When analysing a companies human resources, What are the main areas you would look at? 1.

  • Describing and justifying data analysis to ethics committees

    The questionnaire contains some open ended questions (qualitative) but am fine with analysing those.

  • Cost Volume Profit Analysis of Monteray Co.

    This solution helps in analysing alternate strategies like plan to increase advertising expenses and plan to change the sales force compensation.

  • Conducting and Econometrics Analysis

    An investigator analysing the relationship between food expenditure, disposable income and prices in the US using annual data over the period 1959-83 computes the following regression log(FOOD) = 4.7377 + 0.1069TIME + 0.3506log(PDI) - 0.5086log(PRICE

  • Analyzing the Circuit

    36723 Analyzing the Circuit Demonstrate by analysing the circuit that the inverse of a function can be generated by placing the function in the feedback loop of the op-amp.

View More Related Solutions