6. Unanticipated changes in the rate of inflation

Initially, Neha earns a salary of $400 per year and Lorenzo earns a salary of $200 per year. Neha lends Lorenzo $100 for one year at an annual interest rate of 20% with the expectation that the rate of inflation will be 16% during the one-year life of the loan. At the end of the year, Lorenzo makes good on the loan by paying Neha $120. Consider how the loan repayment affects Neha and Lorenzo under the following scenarios.

Scenario 1: Suppose all prices and salaries rise by 16% (as expected) over the course of the year. In the following table, find Neha's and Lorenzo's new salaries after the 16% increase, and then calculate the $120 payment as a percentage of their new salaries. (Hint: Remember that Neha's salary is her income from work and that it does not include the loan payment from Lorenzo.)

Scenario 2: Consider an unanticipated decrease in the rate of inflation. The rise in prices and salaries turns out to be 5% over the course of the year rather than 16%. In the following table, find Neha's and Lorenzo's new salaries after the 5% increase, and then calculate the $120 payment as a percentage of their new salaries.

An unanticipated decrease in the rate of inflation benefits   and harms   .

In Chapter 5, the book touches on Diffusion of Innovation on page 152 but I wanted to provide you with a little more detail on the topic. It's really important when you think about change- this could be the kind of change that comes when you develop a new product, modify an existing one, or make any kind of organizational change. It's all about how to people adopt (or accept) innovation.

The process by which the use of an innovation- whether a product, a service, or a process- spreads throughout a market group, over time and across various categories of adopters is diffusion of innovation. The theory around diffusion of innovation helps marketers understand the rate at which consumers are likely to adopt a new product or service. It also helps them to identify potential markets and predict sales for their new products.

In the diffusion of innovation theory, five adopter groups have been identified: innovators, early adopters, early mainstream, late mainstream, and laggards (or lagging adopters). I've attached a visual representation of the diffusion of innovation- you will notice it makes a bell curve.

Innovators- are buyers who want to be the first to have a new product or service. They enjoy taking risks and are regarded as highly knowledgable. They are generally very well informed about a certain product category. While they represent only 2.5% of the total market for a new product, they are crucial to the success of any new product because they usually talk a lot about the products and review them vocally.

Example: Think of a person who drives a self-driving car prototype as an innovator OR think of Steve Jobs and the folks at Apple as they created iPhones/iPads, etc.

Early Adopters- This group consists of about 13.5% of all buyers. They generally don’t take as much risk as innovators (they wait to see what innovators say about a product) but they are regarded as opinion leaders for particular product categories as the other three buyer categories often rely on their feedback.

Example: When the iPhone was first released, the very first buyers would be early adopters.  

Early majority- this group represents about 34% of all buyers. This group is crucial because a product usually doesn’t become profitable until this large group purchases it. If this group never becomes large enough, the product or service can fail. The early majority doesn’t take as many risks and tends to wait until the bugs are worked out of a particular product or service.

Example: When the bugs were worked out on the iPhones, this group bought. They waited until the product was purchased and reviewed by the early adopters.

Late majority- this group also represents about 34% of all buyers. This is the last group of buyers to enter a new product market. When they do, the product has achieved its full market potential. By the time this group enters the market, sales tend to level off or may be in decline.  

Example: After several versions of the iPhone were released, they finally decided to ditch their Blackberry and purchase.

Laggards- this group represents about 16% of the market. These consumers like to avoid change and rely on traditional products until they are no longer available.

Example: Laggards STILL use flip phones. They will probably use flip phones until they are no longer manufactured. They resist change at all costs.

I use the example of phones but it's important to keep in mind that the Diffusion of Innovation can apply to just about anything. It's also important to remember that people are not set in their adopter group for every product- it can vary. For example, my stepdad would be a laggard when it comes to phones (he still uses a flip phone). However, he might be considered an early adopter or early mainstream when it comes to golf clubs. He's much more likely to purchase a newer model of golf club than a new phone. So....don't think of people as being stuck in their adopter group, it can certainly vary based on the product/service/process.

What affects the rate of adoption?

Some of the things that affect the rate include:

Relative advantage- this is the degree to which the innovation appears superior to existing products. Example: Electric cars were adopted quickly because of their advantage over gas powered cars.

Compatibility- The degree to which the innovation fits the values and experiences of potential customers. Example: Electric cars are driven the same way as gas powered cars so they fit the experiences of drivers.

Complexity- The degree to which the innovation is difficult to understand or use. Example: This is where self-driving cars may struggle because it's hard to understand how that could be safe.

Divisibility- The degree to which the innovation may be tried on a limited basis. Example: consumers can test-drive electric or self-driving cars which helps increase the adoption rate.

Communicability- The degree to which the results of using the innovation can be observed or described to others. Example: If you can easily describe or demonstrate how to use a self-driving car and how the technology works, you will increased adoption.

Discussion Board Assignment Instructions:

1. Identify a product or service you use where you may be considered an early adopter. Explain.

2. Identify a product or service you use where you may be considered early mainstream or late mainstream. Explain.

3. Identify a product or service you use where you may be considered a laggard. Explain. (We are all laggards in some area. Confession- I still love have the old school Uggs but I don't wear them in public anymore).  

Waterways puts much emphasis on cash flow when it plans for capital investments. The company chose its discount rate of 8% based on the rate of return it must pay its owners and creditors. Using that rate, Waterways then uses different methods to determine the best decisions for making capital outlays.

This year Waterways is considering buying five new backhoes to replace the backhoes it now has. The new backhoes are faster, cost less to run, provide for more accurate trench digging, have comfort features for the operators, and have 1-year maintenance agreements to go with them. The old backhoes are working just fine, but they do require considerable maintenance. The backhoe operators are very familiar with the old backhoes and would need to learn some new skills to use the new backhoes.

The following information is available to use in deciding whether to purchase the new backhoes.

(a) Evaluate in the following ways whether to purchase the new equipment or overhaul the old equipment. (Hint: For the old machine, the initial investment is the cost of the overhaul. For the new machine, subtract the salvage value of the old machine to determine the initial cost of the investment.)

(1) Using the net present value method for buying new or keeping the old. (For calculation purposes, use 5 decimal places as displayed in the factor table provided. If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round final answer to 0 decimal places, e.g. 5,275.)

(2) Using the payback method for each choice. (Hint: For the old machine, evaluate the payback of an overhaul.) (Round answers to 2 decimal places, e.g. 1.25)

(3) Comparing the profitability index for each choice. (Round answers to 2 decimal places, e.g. 1.25)

Calculate the internal rate of return factor for the new and old blackhoes. (Round answers to 5 decimal places, e.g. 5.27647.)

(4) Comparing the internal rate of return for each choice to the required 8% discount rate.

Waterways puts much emphasis on cash flow when it plans for capital investments. The company chose its discount rate of 8% based on the rate of return it must pay its owners and creditors. Using that rate, Waterways then uses different methods to determine the best decisions for making capital outlays.

This year Waterways is considering buying five new backhoes to replace the backhoes it now has. The new backhoes are faster, cost less to run, provide for more accurate trench digging, have comfort features for the operators, and have 1-year maintenance agreements to go with them. The old backhoes are working just fine, but they do require considerable maintenance. The backhoe operators are very familiar with the old backhoes and would need to learn some new skills to use the new backhoes.

The following information is available to use in deciding whether to purchase the new backhoes.

Click here to view PV table.

(a) Evaluate in the following ways whether to purchase the new equipment or overhaul the old equipment. (Hint: For the old machine, the initial investment is the cost of the overhaul. For the new machine, subtract the salvage value of the old machine to determine the initial cost of the investment.)

(1) Using the net present value method for buying new or keeping the old. (For calculation purposes, use 5 decimal places as displayed in the factor table provided. If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round final answer to 0 decimal places, e.g. 5,275.)

(2) Using the payback method for each choice. (Hint: For the old machine, evaluate the payback of an overhaul.) (Round answers to 2 decimal places, e.g. 1.25)

(3) Comparing the profitability index for each choice. (Round answers to 2 decimal places, e.g. 1.25)

Calculate the internal rate of return factor for the new and old blackhoes. (Round answers to 5 decimal places, e.g. 5.27647.)

(4) Comparing the internal rate of return for each choice to the required 8% discount rate.

Waterways Continuing Problem 12 a

Waterways puts much emphasis on cash flow when it plans for capital investments. The company chose its discount rate of 8% based on the rate of return it must pay its owners and creditors. Using that rate, Waterways then uses different methods to determine the best decisions for making capital outlays.

This year Waterways is considering buying five new backhoes to replace the backhoes it now has. The new backhoes are faster, cost less to run, provide for more accurate trench digging, have comfort features for the operators, and have 1-year maintenance agreements to go with them. The old backhoes are working just fine, but they do require considerable maintenance. The backhoe operators are very familiar with the old backhoes and would need to learn some new skills to use the new backhoes.

The following information is available to use in deciding whether to purchase the new backhoes.

Click here to view PV table.

(a) Evaluate in the following ways whether to purchase the new equipment or overhaul the old equipment. (Hint: For the old machine, the initial investment is the cost of the overhaul. For the new machine, subtract the salvage value of the old machine to determine the initial cost of the investment.)

(1) Using the net present value method for buying new or keeping the old. (For calculation purposes, use 5 decimal places as displayed in the factor table provided. If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round final answer to 0 decimal places, e.g. 5,275.)

(2) Using the payback method for each choice. (Hint: For the old machine, evaluate the payback of an overhaul.) (Round answers to 2 decimal places, e.g. 1.25)

(3) Comparing the profitability index for each choice. (Round answers to 2 decimal places, e.g. 1.25)

Calculate the internal rate of return factor for the new and old blackhoes. (Round answers to 5 decimal places, e.g. 5.27647.)

(4) Comparing the internal rate of return for each choice to the required 8% discount rate.

Waterways puts much emphasis on cash flow when it plans for capital investments. The company chose its discount rate of 8% based on the rate of return it must pay its owners and creditors. Using that rate, Waterways then uses different methods to determine the best decisions for making capital outlays.

This year Waterways is considering buying five new backhoes to replace the backhoes it now has. The new backhoes are faster, cost less to run, provide for more accurate trench digging, have comfort features for the operators, and have 1-year maintenance agreements to go with them. The old backhoes are working just fine, but they do require considerable maintenance. The backhoe operators are very familiar with the old backhoes and would need to learn some new skills to use the new backhoes.

The following information is available to use in deciding whether to purchase the new backhoes.

Click here to view PV table.

(a) Evaluate in the following ways whether to purchase the new equipment or overhaul the old equipment. (Hint: For the old machine, the initial investment is the cost of the overhaul. For the new machine, subtract the salvage value of the old machine to determine the initial cost of the investment.)

(1) Using the net present value method for buying new or keeping the old. (For calculation purposes, use 5 decimal places as displayed in the factor table provided. If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round final answer to 0 decimal places, e.g. 5,275.)

(2) Using the payback method for each choice. (Hint: For the old machine, evaluate the payback of an overhaul.) (Round answers to 2 decimal places, e.g. 1.25)

(3) Comparing the profitability index for each choice. (Round answers to 2 decimal places, e.g. 1.25)

Calculate the internal rate of return factor for the new and old blackhoes. (Round answers to 5 decimal places, e.g. 5.27647.)

(4) Comparing the internal rate of return for each choice to the required 8% discount rate.

Waterways puts much emphasis on cash flow when it plans for capital investments. The company chose its discount rate of 8% based on the rate of return it must pay its owners and creditors. Using that rate, Waterways then uses different methods to determine the best decisions for making capital outlays.

This year Waterways is considering buying five new backhoes to replace the backhoes it now has. The new backhoes are faster, cost less to run, provide for more accurate trench digging, have comfort features for the operators, and have 1-year maintenance agreements to go with them. The old backhoes are working just fine, but they do require considerable maintenance. The backhoe operators are very familiar with the old backhoes and would need to learn some new skills to use the new backhoes.

The following information is available to use in deciding whether to purchase the new backhoes.

Click here to view PV table.

(a) Evaluate in the following ways whether to purchase the new equipment or overhaul the old equipment. (Hint: For the old machine, the initial investment is the cost of the overhaul. For the new machine, subtract the salvage value of the old machine to determine the initial cost of the investment.)

(1) Using the net present value method for buying new or keeping the old. (For calculation purposes, use 5 decimal places as displayed in the factor table provided. If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round final answer to 0 decimal places, e.g. 5,275.)

(2) Using the payback method for each choice. (Hint: For the old machine, evaluate the payback of an overhaul.) (Round answers to 2 decimal places, e.g. 1.25)

(3) Comparing the profitability index for each choice. (Round answers to 2 decimal places, e.g. 1.25)

Calculate the internal rate of return factor for the new and old blackhoes. (Round answers to 5 decimal places, e.g. 5.27647.)

(4) Comparing the internal rate of return for each choice to the required 8% discount rate.

Waterways puts much emphasis on cash flow when it plans for capital investments. The company chose its discount rate of 8% based on the rate of return it must pay its owners and creditors. Using that rate, Waterways then uses different methods to determine the best decisions for making capital outlays.

This year Waterways is considering buying five new backhoes to replace the backhoes it now has. The new backhoes are faster, cost less to run, provide for more accurate trench digging, have comfort features for the operators, and have 1-year maintenance agreements to go with them. The old backhoes are working just fine, but they do require considerable maintenance. The backhoe operators are very familiar with the old backhoes and would need to learn some new skills to use the new backhoes.

The following information is available to use in deciding whether to purchase the new backhoes.

Click here to view PV table.

(a) Evaluate in the following ways whether to purchase the new equipment or overhaul the old equipment. (Hint: For the old machine, the initial investment is the cost of the overhaul. For the new machine, subtract the salvage value of the old machine to determine the initial cost of the investment.)

(1) Using the net present value method for buying new or keeping the old. (For calculation purposes, use 5 decimal places as displayed in the factor table provided. If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round final answer to 0 decimal places, e.g. 5,275.)

(2) Using the payback method for each choice. (Hint: For the old machine, evaluate the payback of an overhaul.) (Round answers to 2 decimal places, e.g. 1.25)

(3) Comparing the profitability index for each choice. (Round answers to 2 decimal places, e.g. 1.25)

Calculate the internal rate of return factor for the new and old blackhoes. (Round answers to 5 decimal places, e.g. 5.27647.)

(4) Comparing the internal rate of return for each choice to the required 8% discount rate.

The CFL: Coming Soon to a Light Socket Near You

In a nation with 4 billion light sockets, one light bulb per household can make a real difference. If every U.S. household

replaced one ordinary incandescent light bulb with a compact fluorescent lamp (CFL), the energy saved would be enough

to light 3 million homes. This single change would be the environmental equivalent of taking 800,000 cars off the road

and preventing 450 pounds of greenhouse gases from reaching the atmosphere. Change a light bulb, help the planet, slash

energy costs

—sounds like a win

-win situation.

Yet since the CFL’s invention more than 30 years ago, it has been slow to catch on. Meanwhile, the incandescent light

bulb, which was commercialized more than a century ago, still accounts for more than 90 percent of all light bulbs sold in

the U.S. Why have CFLs not been more popular?

•

Higher price.

One big reason that CFLs have not been big sellers is because each costs five to seven times more than

an incandescent light bulb does. A

CFL can last up to twelve times as long as an incandescent bulb does, and

installing even a few will make a noticeable difference in a household’s monthly electric bill. However, the initial

outlay has discouraged many people from making the switch.

•

Not t

he same old light bulb.

A second reason is that CFLs do not work as well as incandescent bulbs do in certain

circumstances, such as in fixtures outfitted with dimmers or in spotlights. Because the two types of bulbs are not

completely interchangeable, cons

umers have to do at least a little research and possibly some experimentation to

determine when they can and cannot install a CFL in place of an incandescent bulb. Instead, most consumers stay

with what they know and keep buying the same type of bulbs they

have always used.

•

Still too new.

Until very recently, few CFLs could be found on store shelves; those that were available had to compete

with rows and rows of incandescent light bulbs. And CFLs were rarely featured in advertising. Despite some

publicity, not everyone was getting the message about the CFL’s energy efficiency and the long

-term cost benefits of

switching from incandescents.

•

Disposal concerns.

Because CFLs contain a minute amount of mercury, they must be handled like hazardous waste

instead of

being thrown away like ordinary light bulbs. Sylvania provides customers with special packaging to return

burnt

-out CFLs for recycling by dropping them off at FedEx Kinko’s or at local post offices. However, even when

consumers know about the benefits of CFLs, they may not know how to dispose of them safely.

Now the CFL is coming into its own amid a growing chorus of campaigns by retailers, manufacturers, utilities, and

government agencies. Wal

-Mart is putting a major marketing push behind CFLs, featuring them in ads and on the Web to

encourage its 100 million customers to buy at least one new bulb. The retailer has even added CFLs to its back-

to-school

shopping list for eco-

friendly products that it has posted on Facebook to reach “green teens.” Utilities such as Pacific Gas

& Electric in California have given away free CFLs or have offered CFLs at reduced prices to encourage customers to at

least try the bulbs.

Major bulb manufacturers like General Electric, Philips, and Sylvania are helping to educate con

sumers about CFLs

through on-

package information and in marketing communications such as ads and media interviews. With new

government standards calling for the phase

-out of regular incandescent light bulbs over the next 10 years, manufacturers

are also testing energy

-efficient lighting alternatives such as low

-heat incandescent bulbs, new halogen bulbs, and light

-

emitting diode (LED) bulbs. Soon light sockets all over America will be lit with CFLs and other new bulbs.

i

Case Questions

1. Would you characterize the CFL as discontinuous, dynamically continuous, or continuous? How does this level of innovation help to explain why CFLs have diffused relatively slowly through the market?