My Story

1. A company is considering two mutually exclusive projects A and B. Both require an initial investment of Rs. 70,000 each and have a life of 5 years. The company's required rate of return is 10 percent. And pays tax at 50 percent rate. The project will be depreciated on straight line basis. The net cash flows for the 2 projects is as follows:

Years Project P Project Q

1 Rs 10,000 Rs 50,000

2 Rs 20,000 Rs 40,000

3 Rs 30,000 Rs 20,000

4 Rs 45,000 Rs 10,000

5 Rs 60,000 Rs 10,000

1. Calculate payback period, Net Present Value at 10 percent discount rate, Profitability Index and Internal Rate of Return.

2. Which project should be selected and Why?

Case : Shall We Put up Our Price?

When you buy a can of drink on a train, or an ice-cream in the cinema, or a bottle of wine in a restaurant, you may well be horrified by its price. How can they get away with it? The answer is that these firms are not price takers. They can choose what price to charge. Here it is useful to see how price elasticity of demand can help to explain their behaviour. Take the case of the can of drink on the train. If you are thirsty, and if you haven't brought a drink with you, then you will have to get one from the train's pantry, or go without. There is no substitute. What we are saying here is that the demand for drink on the train is inelastic. This means that the train operator can put up the price of its drinks, and food too, and earn more revenue. Generally, the less the competition a firm faces, the lower will be the elasticity of demand for its products, since there will be fewer substitutes (competitors) to which consumers can turn. The lower the price elasticity of demand, the higher is likely to be the price that the firm charges. When there is plenty of competition, it is quite a different story. Petrol stations in the same area may compete fiercely in terms of price. One station may hope that by reducing its price by 1p or even 0.1p per litre below that of its competitors, it can attract customers away from them. With a highly elastic demand, a small reduction in price may lead to a substantial increase in their revenue. The problem is, of course, that when they all reduce prices, no firm wins. No one attracts customers away from the others. In this case it is the customer who wins.

Questions:

a) Why a restaurant charge very high prices for wine and bottled water and yet quite reasonable prices for food?

b) Why are clothes with designer labels so much more expensive that similar 'own brand' clothes from a chain store, even though they may cost a similar amount to produce?

Q 4.

Case : Discounts and Total Revenue

After completing his post graduate diploma in management from All India Management Association, Mr. Ram Lok was doing well as the regional manager of a large supermarket chain when he decided to leave his job and open his own business. He set up a local petrol pump and convenience store in April, 2002. He chose to locate his petrol station in an area at least ten minutes away by car from the nearest supermarket or grocery store. For the most part, his business has been quite successful.

The items that he carried in his store were typical of those found in retail establishments of this type, with tea, coffee and soft drinks being the best-selling items in his store. Essentially, the retail price of soft drinks was based on the wholesale price plus a mark-up of about 40 per cent. Ram Lok recognized that people were