A B C D E F G H I J K L M N O Problem 12.10 Hurte-Paroxysm Products, Inc. (B) Assume the same facts as in Hurte-Paroxysm Products, Inc. (A). HP Products also believes that if it maintains the same price in Brazilian reais as a permanent policy, volume will increase at 10% per annum for six years. Dollar costs will not change. At the end of six years HP Products' patent expires and it will no longer export to Brazil. After the reais is devalued to RS4.00/USS no further devaluation is expected. If HP Products raises the price in reais so as to maintain its dollar price, volume will increase at only 4% per annum for six years, starting from the lower initial base of 40, units. Again dollar costs will not change, and at the end of six years HP Products will stop exporting to Brazil. HP Products' weighted average cost of capital is 12%. Given these considerations, what do you recommend for HP Products' pricing policy? Justify your recommendation. 8 9 10 Assumptions Initial sales volume Sales volume growth Sales price, USS Direct cost per unit Value 50,000 10% $170.00 $120.00 vear Present Value Alternative #1: Maintain current Brazilian sales price and volume grows 10% per annum Contribution 12% Sales volume USS Revenue Direct Costs Margin PV Factor 50,000 55,000 60,500 66,550 73,205 80,526 Present value of contribution margins JL A B C D E F G H I J K L M N O Assumptions Initial sales volume Sales volume growth Sales price, USS Direct cost per unit Value 40,000 4% $200.00 $120.00 End of year Contribution Alternative #2: Raise Brazilian sales price to R$400 and volume grows only 4% per annum from a lower volume base 12% Sales volume USS Revenue Direct Costs Margin P V Factor Present Value 40,000 41,600 43,264 44,995 46,794 48,666 Present value of contribution margins Which alternative is preferable? 49 50