Newport Lifts, a US company, exports heavy crane equipment to several Chinese dock facilities. Sales are currently 1,000,000 units per year at the yuan equivalent of $24,000 each. The Chinese yuan has been trading at Yuan 7/$, but a Hong Kong advisory service is predicting the yuan will appreciate to Yuan 6/$, after which it will remain unchanged for a decade. Accepting this forecast as given, Newport Lifts faces a pricing decision: (a) either maintain the yuan price and in effect sell for more dollars, in which case Chinese volume would not change, or (b) maintain the same dollar price and lower the yuan price in China to offset the revaluation, and experience a 10% increase in unit volume. Assume that per unit direct costs are 60% of the US sales price and that this per unit cost does not change with the pricing decision. a) What would be the one-year implications of each pricing strategy (calculate the implications)? Which do you recommend?

b) Suppose the financial manager believes that if Newport maintains the same yuan price, volume will increase by 5% per year for the next 8 years (starting from a value of 1,000,000 units in year 0). If, on the other hand, Newport reduces its yuan price to maintain the same dollar price, volume is expected to rise by 12% per year over the next 8 years, starting from a higher initial base of 1,100,000 units in year 0. Assume as above that unit dollar costs remain unaffected by the pricing decision. The companys weighted average cost of capital is 10%. Which pricing strategy would you recommend for the long-term? How does this compare with your decision in part (a)? )? How does the assumption of the elasticity of demand affect the result?