Question: Hurte-Paroxysm Products, Inc. (B). Assume the same facts as in Problem. HP also believes that if it maintains the same price in Brazilian reais as a permanent policy, volume will increase at 10% per annum for six years, costs will not change. At the end of six years, HP's patent expires and it will no longer export to Brazil. After the reais is devalued to R$4.00/US$, no further devaluation is expected. If HP raises the price in reais so as to maintain its dollar price, volume will increase at only 4% per annum for six years, starting from the lower initial base of 40,000 units. Again, dollar costs will not change, and at the end of six years, HP will stop exporting to Brazil. HP's weighted average cost of capital is 12%. Given these considerations, what do you recommend for HP's pricing policy? Justify your recommendation.
Problem: Hurte-Paroxysm Products, Inc. (A). Hurte-Paroxysm Products, Inc. (HP) of the United States, exports computer printers to Brazil, whose currency, the reais (R$) has been trading at R$3.40/US$. Exports to Brazil are currently 50,000 printers per year at the reais equivalent of $200 each. A strong rumor exists that the reais will be devalued to R$4.00/$ within two weeks by the Brazilian government. Should the devaluation take place, the reais is expected to remain unchanged for another decade. Accepting this forecast as given, HP faces a pricing decision which must be made before any actual devaluation: HP may either
1) maintain the same reais price and in effect sell for fewer dollars, in which case Brazilian volume will not change, or
2) maintain the same dollar price, raise the reais price in Brazil to compensate for the devaluation, and experience a 20% drop in volume. Direct costs in the United States are 60% of the U.S. sales price. What would be the short-run (1-year) implication of each pricing strategy? Which do you recommend?