Question

Manitowoc Crane​ (B).  Manitowoc Crane​ (U.S.) exports heavy crane equipment to several Chinese dock facilities. Sales are currently 16,000 units per year at the yuan equivalent of $22, 000 each. The Chinese yuan​ (renminbi) has been trading at Yuan8.30​/$, but a Hong Kong advisory service predicts the renminbi will drop in value next week to Yuan9.20​/$, after which it will remain unchanged for at least a decade. Accepting this forecast as​ given, Manitowoc Crane faces a pricing decision in the face of the impending devaluation. It may either​ (1) maintain the same yuan price and in effect sell for fewer​ dollars, in which case Chinese volume will not​change; or​ (2) maintain the same dollar​ price, raise the yuan price in China to offset the​ devaluation, and experience a​ 10% drop in unit volume. Direct costs are​ 75% of the U.S. sales price.

​Additionally, financial management believes that if it maintains the same yuan sales​ price, volume will increase at 12% per annum through year eight. Dollar costs will not change. At the end of 8​ years, Manitowoc's patent expires and it will no longer export to China. After the yuan is devalued to Yuan9.20​/$,no further devaluations are expected. If Manitowoc Crane raises the yuan price so as to maintain its dollar​ price, volume will increase at only 1.5​%per annum through year​ eight, starting from the lower initial base of 14,400 units.​ Again, dollar costs will not​ change, and at the end of eight years Manitowoc Crane will stop exporting to China.​Manitowoc's weighted average cost of capital is 15%.

Given these​ considerations, what should be​ Manitowoc's pricing​ policy?

CASE 1

If Manitowoc Crane maintains the same yuan price and in effect sells for fewer​ dollars, the annual sales price per unit is equal to ​($22,000 x Yuan8.30​/$) / Yuan9.20​/$ = ​$19, 847.83. The direct cost per unit is​ 75% of the​ sales, or ​$22, 000
x 0.75 = $ 16,500. Calculate the gross profits for years 1 through 4 in the following​ table:  ​(Round to the nearest​ dollar.)

Case 1	Year 5	Year 6	Year 7	Year 8
Sales volume (units)	16,000
Sales price per unit	$19,847.83	$19,847.83	$19,847.83	$19,847.83
Total sales revenue
Direct cost per unit	$16,500	$16,500	$16,500	$16,500
Total direct costs
Gross profits

Calculate the growth profits for years 5 through 8 in the following​ table:  ​(Round to the nearest​ dollar.)

Case 1	Year 5	Year 6	Year 7	Year 8
Sales volume (units)
Sales price per unit	$19,847.83	$19,847.83	$19,847.83	$19,847.83
Total sales revenue
Direct cost per unit	$16,500	$16,500	$16,500	$16,500
Total direct costs
Gross profits

If​ Manitowoc's weighted average cost of capital is 15%, what is the cumulative present value of the​ firm's gross​ margin?

​$_____ ​(Round to the nearest​ dollar.)

CASE 2
If Manitowoc Crane maintains the same dollar​ price, raises the yuan price in China to offset the​ devaluation, and experiences a​ 10% drop in unit​ volume, the annual sales price per unit is ​$22,000. The direct cost per unit is​ 75% of the​ sales, or $ 22,000 x 0.75 = $16,500 and the sales volume in year 1 is 16,000 x ​(1 -​ 0.10) = 14, 400.
Calculate the growth profits for years 1 through 4 in the following​ table: (Round to the nearest​ dollar.)

Case 2	Year 1	Year 2	Year 3	Year 4
Sales volume (units)	14,400
Sales price per unit	$22,000	$22,000	$22,000	$22,000
Total sales revenue
Direct cost per unit	$16,500	$16,500	$16,500	$16,500
Total direct costs
Gross profits	$	$	$	$

Calculate the growth profits for years 5 through 8 in the following​ table:  ​(Round to the nearest​ dollar.)

Case 2	Year 5	Year 6	Year 7	Year 8
Sales volume (units)
Sales price per unit	$22,000	$22,000	$22,000	22,000
Total sales revenue
Direct cost per unit	$16,500	$16,500	$16,500	$16,500
Total direct costs
Gross profits	$	$	$	$

If​ Manitowoc's weighted average cost of capital is 15%, what is the cumulative present value of the​ firm's gross​ margin?

​$_____ ​(Round to the nearest​ dollar.)
What should be​ Manitowoc's pricing​ policy?  ​(Select from the​ drop-down menu.)
Case ____ is better because it yields higher profits.

Answer 1

Solution:

I am rounding the units also to whole numbers.

The solution for Case 1 is as under:

The solution for Case 2 is as under:

As seen, the NPV of Case 2 is higher than Case 1.

Case 2 is better because it yields higher profits.

-x-