If the Rhine Company ignores the possibility that other firms may enter its market, it should set a price of $10,000 for its product, which is a power tool. But if it does so, other firms will begin to enter the market. During the next two years it will earn $4 million per year, but in the following two years it will earn $1 million per year. On the other hand, if it sets a price of $7,000, it will earn $2.5 million in each of the next four years because no entrants will appear. Try various discount (interest) rates and draw a conclusion about the timing of profits

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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If the Rhine Company ignores the possibility that other firms may enter its market, it should set a price of $10,000 for its product, which is a power tool. But if
it does so, other firms will begin to enter the market. During the next two years it will earn $4 million per year, but in the following two years it will earn $1
million per year. On the other hand, if it sets a price of $7,000, it will earn $2.5 million in each of the next four years because no entrants will appear.
Try various discount (interest) rates and draw a conclusion about the timing of profits
Transcribed Image Text:If the Rhine Company ignores the possibility that other firms may enter its market, it should set a price of $10,000 for its product, which is a power tool. But if it does so, other firms will begin to enter the market. During the next two years it will earn $4 million per year, but in the following two years it will earn $1 million per year. On the other hand, if it sets a price of $7,000, it will earn $2.5 million in each of the next four years because no entrants will appear. Try various discount (interest) rates and draw a conclusion about the timing of profits
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