Tandem Bicycles is noticing a decline in sales due to increased competition from abroad. The CFO sees the following options to respond:
1. Lower price, resulting in a 1.3M decline in cash flows. If they lower price, there is a 55% chance they will lose no other cash flow to imports and a 45% chance that they will lose another $550,000 in cash flow to imports.
2. Hire a lobbyist to convince the government that there should be tariffs on imported bicycles. This will cost $800,000 and have a 75% chance of working. If it works there will be no cash flow loss to Tandem, but if it doesn’t, there will be $2M reduction in cash flow.
What would you recommend and why?