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 10 percent, should the Rhine Company set a price of $7,000 or $10,000?a. NPV $8.4M for $10,000 priceb. NPV $10.0M for $10,000 pricec. NPV $7.9M for $7,000 priced. NPV $10.0M for $7,000 price

Calculation of present value of earning (PVOE) using excel when the price of product is $10,000:

Answered: If the Rhine Company ignores the…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Expando, Inc. is considering the possibility of building an additional factory that would produce a new addition to its product line. The company is currently considering two options. The first is a small facility that it could build at a cost of $7 million. If demand for new products is low, the company expects to receive $11 million in discounted revenues (present value of future revenues) with the small facility. On the other hand, if demand is high, it expects $14 million in discounted revenues using the small facility. The second option is to build a large factory at a cost of $12 million. Were demand to be low, the company would expect $13 million in discounted revenues with the large plant. If demand is high, the company estimates that the discounted revenues would be $17 million. In either case, the probability of demand being high is 0.50, and the probability of it being low is 0.50. Not constructing a new factory would result in no additional revenue being generated because…
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Expando, Inc. is considering the possibility of building an additional factory that would produce a new addition to its product line. The company is currently considering two options. The first is a small facility that it could build at a cost of $5 million. If demand for new products is low, the company expects to receive $10 million in discounted revenues (present value of future revenues) with the small facility. On the other hand, if demand is high, it expects $12 million in discounted revenues using the small facility. The second option is to build a large factory at a cost of $10 million. Were demand to be low, the company would expect $13 million in discounted revenues with the large plant. If demand is high, the company estimates that the discounted revenues would be $16 million. In either case, the probability of demand being high is 0.70, and the probability of it being low is 0.30. Not constructing a new factory would result in no additional revenue being generated because…
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