Question
The Atlas Corp. of the United States exports computer software to the euro zone. Sales are currently 12,000,000 units per year priced in euros such
The Atlas Corp. of the United States exports computer software to the euro zone. Sales are currently 12,000,000 units per year priced in euros such that, at the current euro price the price translates into $148 per unit. The euros current price is $1.1242/ but is expected to depreciate in a few days by 6.24% after which it will remain unchanged for at least ten years. Accepting this forecast, Atlas Corp. faces a pricing decision in anticipation of the appreciation. It may either 1) maintain the same euro price and in effect sell for sell dollars, in which case its export volume will increase by 15% per year for the first five years and then by 8% per year for the following five years, or 2) maintain the same dollar price by increasing the euro price in the Euro-zone, and experience a mere 2% increase in volume during the current year then an increase by 5% per year for the following nine years. Dollar costs will not change. At the end of ten years, the software will be obsolete and will no longer be exported. After the euro depreciates by 6.24% no further depreciation is expected. Direct costs are currently 70% of the U.S. sales price and that cost will not change over the ten year horizon. Atlas weighted average cost of capital is 13%. Given these considerations, which pricing policy should Atlas follow? Explain why, then comment on the implications of the decision as to the competitive position of Atlas in the Euro-zone market.
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