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 ifit 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 two years it will earn $1million 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 because no entrants will appear.If the interest rate is 8 percent, should the Rhine Company set a price of $7,000 or $10,000?a. NPV $10.0M for $7,000 priceb. NPV $10.0M for $10,000 pricec. NPV $7.3M for $7,000 priced. NPV $8.7M for $10,000 price

Question
Asked Oct 3, 2019
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 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 because no entrants will appear.
If the interest rate is 8 percent, should the Rhine Company set a price of $7,000 or $10,000?
a. NPV $10.0M for $7,000 price
b. NPV $10.0M for $10,000 price
c. NPV $7.3M for $7,000 price
d. NPV $8.7M for $10,000 price
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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 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 because no entrants will appear. If the interest rate is 8 percent, should the Rhine Company set a price of $7,000 or $10,000? a. NPV $10.0M for $7,000 price b. NPV $10.0M for $10,000 price c. NPV $7.3M for $7,000 price d. NPV $8.7M for $10,000 price

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check_circleExpert Solution
Step 1

Net present value of future sales revenue at both price levels.

 

C
A
B
D
Net present value at selling price of $10000
1
2
3 Year
Sales revenue (in million dollar)
Present value factor of 8%
Present value (in million dollar)
=1/1.08^1
-B4*C4
4 1
=1/1.08^2
5 2
B5*C5
=1/1.08A3
B6*C6
6 3
=1/1.08^4
87*C7
7 4
Net present value
=SUM(D4:D7)
Net present value at selling price of $7000
10
11
Present value factor of 8%
12 Year
Sales revenue (in million dollar)
Present value (in million dollar)
=1/1.08^1
=1/1.08^2
=1/1.08A3
13 1
B13 C13
2.5
14 2
B14*C14
2.5
15 3
B15*C15
2.5
B16 C16
=1/1.08^4
16 4
2.5
Net present value
=SUM(D13:D16)
17
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C A B D Net present value at selling price of $10000 1 2 3 Year Sales revenue (in million dollar) Present value factor of 8% Present value (in million dollar) =1/1.08^1 -B4*C4 4 1 =1/1.08^2 5 2 B5*C5 =1/1.08A3 B6*C6 6 3 =1/1.08^4 87*C7 7 4 Net present value =SUM(D4:D7) Net present value at selling price of $7000 10 11 Present value factor of 8% 12 Year Sales revenue (in million dollar) Present value (in million dollar) =1/1.08^1 =1/1.08^2 =1/1.08A3 13 1 B13 C13 2.5 14 2 B14*C14 2.5 15 3 B15*C15 2.5 B16 C16 =1/1.08^4 16 4 2.5 Net present value =SUM(D13:D16) 17

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Step 2

Results of formula u...

A
Net present value at selling price of $10000
1
Sales revenue (in
million dollar)
Present value
Present value (in
million dollar)
factor of 8%
3 Year
$4
$3.7
1
0.9259
4
$4
$3.4
$0.8
$0.7
$8.7
0.8573
5
2
$1
6
3
0.7938
$1
4
7
0.7350
8
Net present value
9
Net present value at selling price of $7000
10
11
Sales revenue (in
million dollar)
Present value
Present value (in
factor of 8%
million dollar)
$2.3
$2.1
12 Year
$2.5
0.9259
13
1
$2.5
14
2
0.8573
$2.5
$2.5
$2.0
0.7938
15
$1.8
16
4
0.7350
$8.3
Net present value
17
12
unoN
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A Net present value at selling price of $10000 1 Sales revenue (in million dollar) Present value Present value (in million dollar) factor of 8% 3 Year $4 $3.7 1 0.9259 4 $4 $3.4 $0.8 $0.7 $8.7 0.8573 5 2 $1 6 3 0.7938 $1 4 7 0.7350 8 Net present value 9 Net present value at selling price of $7000 10 11 Sales revenue (in million dollar) Present value Present value (in factor of 8% million dollar) $2.3 $2.1 12 Year $2.5 0.9259 13 1 $2.5 14 2 0.8573 $2.5 $2.5 $2.0 0.7938 15 $1.8 16 4 0.7350 $8.3 Net present value 17 12 unoN

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