Question
Howitzer-Picaso Products, Inc. (HPP) a US company exports finished goods to Brazil, whose currency, the reais (symbol R$) has been trading at R$3.514/US$. Exports to
Howitzer-Picaso Products, Inc. (HPP) a US company exports finished goods to Brazil, whose currency, the reais (symbol R$) has been trading at R$3.514/US$. Exports to Brazil are currently 70,000 units per year at the reais equivalent of $175 each. A strong rumor exists that the reais will be devalued to R$4.25/$ within the month by the Brazilian government. Should the devaluation take place, the reais is expected to remain unchanged for another decade. Accepting this forecast as given, HPP faces a pricing decision, before any actual devaluation: they can either re-price the product in reais, keeping the dollar sales value the same with lower volume, or leave the price unchanged and assume higher sales and sales growth.
Which do you recommend given the following assumptions for the project? Direct cost per unit is 60% of the dollar price ($175.00). HP Products also believes that if it maintains the same price in Brazilian reais as a permanent policy, volume will increase at 7% per annum for six years. At the end of six years HPPs patent expires and it will no longer export to Brazil. 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 a lower initial base of 45,000 units. Dollar costs will not change, and at the end of six years, HP Products will stop exporting to Brazil. HPPs weighted average cost of capital is 14%.
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