Chapter 5

Pricing, Advertising and

Investment policies in business
-

Presenter: Vo Hoang Kim An

Foreign Trade University – Hochiminh City – Vietnam
 trove truck
'

prang strategy
1.
Pricing policies

2
HEADLINE: Mickey Mouse Lets You Ride “for Free” at Disney
World

Walt Disney World Theme Parks offer

visitors a wide variety of ticket choices.
The one thing these ticket options have in
common is that they entail a fixed
entrance fee and allow customers to take
as many rides as they want at no
additional charge. For instance, by
purchasing a 1-Day ticket for about $105,
a customer gains unlimited access to the
park of her choice for one day.
Wouldn’t Disney earn higher profits if it
charged visitors, say, $10.50, each time
they went on a ride?
3
 OVERVIEW
1. Basic pricing strategies
○ Perfect competition
○ Monopoly & Monopolistic Competition
○ Cournot Oligopoly
2. Strategic pricing for greater profits
○ Price Discrimination o Two-part pricing
○ Block Pricing o Commodity Bundling
3. Pricing strategies for special structure of cost and
demand structures
○ Peak-Load Pricing
○ Cross -Subsidies
4
 “
BASIC PRICING STRATEGIES

5
 equilibrium point
PERFECT COMPETITION
S
Price (dollars)

Price (dollars)
P0
P0 D = MR

0 Q0 0 Quantity
Quantity Panel B – Demand curve
Panel A – facing a price- 7
 mhvingprinciplennn-hquyitdin.htrongngai iha.no
PERFECT COMPETITION

:avñoKhiraQ*
du

Short-run Output Decision végiavñsañ

Whether
÷:* ◎ AVC tells whether to produce
○ Shut down if price falls below minimum AVC
taping
i
p=MC ◎ SMC tells how much to produce howmuoh
○ If P ³ minimum AVC, produce output at which
P = SMC
◎ ATC tells how much profit/loss if produce
• p = ( P - ATC )Q
8
 MWR howmnohlo
structure PERFECT COMPETITION
[
produce
" " Market

mµimiPÑ
→
• price
TotalProfit
revenue =$36 x 600
= $21,600 -
$11,400= $21,600

µc=M& = $10,200 hownmch

profit
whether to produce

Total cost = $19 x 600 µ.

= $11,400 0

9
 with minimum Point of Arc sina.ua Are

market price
compare PERFECT COMPETITION
market
vpriavoiotieñrithais
ernaidtñgciia nhat Mcgrain
1. AVC
prievoiluc-so-hi.o rg
!
hay
2. tiepin
:ohIthÑ simphañ
Profitcost
Total = $3,150
= $17 x -300
$5,100 = $5,100 =-
$1,950

still able
compensate Total revenue = $10.50 x 300 \µE=Mc↳ the lost
here only
not shut
= $3,150 the fixed
down cost 10
nhinvño LONG-RUN PROFIT-MAXIMIZING EQUILIBRIUM
9MR=MC toiitdhoñpnyjs
nai market
mtoñthithioig entry
bongrun Cho DN t

otangwloi nhnai.ru signal

g. = market
Profit = ($17 - $12) x
240 = $1,200 price
entry

;!:"YµI⇐I
"""

I
market "

A
"'M"
"
need $
we perfect Compean

tianya.mu
"
*an:* doanhnyhil.PT it

pÉ baiigthi
.
truing
fu no
firm
trongdaiha.nu out industry
no get
enter

-
11
 Short-Run Profit Maximization for Monopoly - monopolistic
(1) MR=Hc Q
again intersect voiding demand
competition
*

xotxemvoFQdvsxvoFATCbaonkai.ME/UR
It

4)
cost
I
••
quantity

/
chat
☒ wit? six
ooh
= demand curve
for the
market
naif
WWA V

12
Maximizing Profit at Aztec Electronics: An Example

◎ Aztec possesses market power via patents

◎ Sells advanced wireless stereo headphones
◎ Using time-series data over the ten-year time period
1994-2004, estimated demand function:
Q = 41.000 - 500P + 0,6M - 22,5Pr
○ Q: Output; P: Price of advanced wireless stereo
headphones; M: Consumer Income; Pr: Price of
signal tuning tool
0.6-95,006 235.800
41,000 -500 P +
-

/ Q =
13
 Maximizing Profit at Aztec Electronics: An Example

iij.IE
◎ From a consulting firm, Aztec predicted consumer income
and price of signal tuning tool in 2002 are $45.000 and $800,
respectively.
◎ Aztec estimated their average variable cost function:
-

-
AVC = 28 - 0,005Q + 0,000001Q2
Requests:
◎ What is Aztec’s optimal decision in 2005, knowing that their
estimated fixed cost is $270.000?
◎ What is Aztec’s decision when the demand function
changes as a result of reduced consumer income?
P = 80 – 0,002Q 14
 tc-AVC.at FC

TC=28Q -

0,00507+0,000001013-12-70000
ME 28 -
0101A -10,0000039
TñQ= 50000-50010

Q -50000=50 up
Ii AVC ATC

1=1177 ¥-100 =P

% -100A
-

TR :
P / ,

fMR) §
MR. -
-100

ER =P .Q ,
,

-
44=61000
Q¥fd { ¥48
"
should
produce
 F- 80-0,0201

Tk .
-

80A -
0,02012
MR = 80 -

0104A

{ ¥rc
MR :tk
 Profit Maximization at Aztec
Electronics

15
 ② -0
→
I <
-
→
→

' ' ' ' ' '

*
i &
-0g µ
a -
I -098
1 ☒
a o S
9 .

-
f 22
¥ 1
f
H o E -80% s
-
~ • +
•
§ •
⇐ o
0oz e
22 + -
a
, ,
- a &
↳ -0 a
⇐ § is o
E
N o
o e
a P E o
↳ o -
o

o o E -05
,
§ 0 ,
no
1 ' '

Eg -0 it
• ⇐
" "
a
¥→§ §g ⇐
+ • Go 1

• ⇐ E
S O
-
E "
E no
É
a
⇐ a
§
a
§
±

¥
¥
 A SIMPLE MARKUP RULE

◎ Suppose the elasticity of demand for the firm’s product is !!

"#$!
◎ Since: MR = $!
"
◎ Setting MR = MC and simplifying yields this simple pricing
formula:
!!
! = "#! #$=%&#$
!
(K: the profit-maximizing markup factor)
◎ The optimal price is a simple markup over relevant costs!
○ More elastic the demand, lower markup.
○ Less elastic the demand, higher markup.
16
AN EXAMPLE

◎ Elasticity of demand for Kodak film is -2.

!! $%
◎!= "#!!
#$= "$%
#$ = 2 x MC
◎ Price is twice marginal cost.
◎ Fifty percent of Kodak’s price is margin above
manufacturing costs.

17
Ef →

tiñhk
Is
dinhgiégñp's
lari

18
 MARKUP RULE FOR COURNOT OLIGOPOLY

◎ Homogeneous product Cournot oligopoly.

◎ N = total number of firms in the industry.
◎ Market elasticity of demand '&
◎ Elasticity of individual firm’s demand is given by: '" = N x!!
!!
◎ Since ! = #$=%&#$
"#!!
+!!
◎ Then ! =
Many
"#+!!
#$
◎ The greater the number of firms, the lower the profit-
maximizing markup factor.
19
 AN EXAMPLE
◎ Homogeneous product Cournot industry, 3 firms.
◎ MC = $10.
◎ Elasticity of market demand0
= - 1/2.
◎ Determine the profit-maximizing price?
µ =3
Eµ= I
-

F- [ ?;;÷ ]
" =
.

14-
 BASIC PRICING

◎ Perfect competition: P = MC
◎ Monopoly and Monopolistic: MR = MC
#"
!= &' = ()&'
1 + #"
"!
○ K = #$" : the profit-maximizing markup factor
!

#
◎ Oligopoly: ! = 1 − &'
#$N%!
○ N - number of firms in the industry,
○ !! -the market elasticity of demand

21
 siiabaithi

Q : 135,15 -0114170,54A -

5,78 D

Choose A as 100 ,
Das 50

01=-99,85-9141 '

e-
¥ -109¥ ,

TR =P ✗ Q
¥µ -199%-01
-

99¥
'
MR TR
-

- = Q - +

|TC=MC# = 5Q

TC= TVC
HR = MC
36,98
= Ty .
(-99,85-0,148)
=) Q =

IT
-

Qiu :

TR TC MCQ
profit Pa
-
-
= =
 Tim profit maximizing
-

price

{ profit maximizing a profit =

TRTC

→ charge price that

a writ =µc
per
-

the two-part pricing

$5
Yeah
ride PIMC :

v
fixed entrance
fee equal to
,

Qi 99115
F- P=
-0¥ -199,8¥
0

P=5=)Q :

consumer surpluses If __ 7

* .

G--99,15
a
quanitysold -711--5=19
Profit ITCQ)=

same

③ Are :$ 2 tR=%%%Éjj%
E- $8 TITANIUM and -401000
W $4

t's
-

"

:p"¥¥µ¥
urger
bolt?

i*ooi%i¥E
low
king
.

"

L
45,16%7,27
em high
151000 11000 Tpyoffg
 “
STRATEGIC PRICING FOR
GREATER PROFITS
all customers
Mcroi apply for
caifioténgiannhoii MR =

22
STRATEGIC PRICING FOR GREATER PROFITS
◎ Most models examined to this point involve a “single”
equilibrium price
◎ In reality, there are many different prices being
charged in the market
1. Price discrimination Me
2. Two-part pricing
3. Block pricing µp=
4. Commodity bundling
23
 PRICE DISCRIMINATION

Price discrimination: The practice of charging

different prices to consumers for the same
good or service.
3 basic forms:
1. First-degree price discrimination
2. Second-degree price discrimination
3. Third-degree price discrimination
24
 FIRST-DEGREE (PERFECT) PRICE
DISCRIMINATION lawyer
extremely difficult
◎ Every unit is sold for the doctor
maximum price each consumer
is willing to pay
pycharlrics
○ Allows the firm to capture entire
consumer surplus
◎ Difficulties cardlallr
real estate
○ Requires precise knowledge about
every buyer’s demand for the good dealer
○ Seller must negotiate a different
price for every unit sold to every
buyer
14-
 conswmqswrpluscinlai.ua KH
SECOND-DEGREE PRICE DISCRIMINATION

\
know
doesn't
◎ Lower prices are offered for larger
quantities and buyers can self-select → price
maximum
the price by choosing how much to buy extract part
◎ Given the posted schedule of prices,
only
→ surplus
consumer
consumers sort themselves according of
to their willingness to pay for
alternative quantities of the good.
◎ The firm charges different prices to
different consumers, but does not need
to know specific characteristics of
5.2
I
individual consumers. caih bit
◎ Example: electric utilities ea-loi.nhua.rs
.

voi me

14-
AN EXAMPLE MR 1500
-

109
chothieii =

You are a pricing analyst for QuantCrunch Corporation, a company that

recently spent $15,000 to develop a statistical software package. To date,
you only have one client. A recent internal study revealed that this client’s

=
demand for your software is Qd = 300 – 0.2P and that it would cost you
$1,000 per unit to install and maintain software at this client’s site. The CEO
of your company recently asked you to construct a report that compares (1)
the profit that results from charging this client a single per-unit price with (2)
the profit that results from charging $1,450 for the first 10 units and $1,225
for each additional unit of software purchased. Construct this report,
including in it a recommendation that would result in even higher profits.

14-
 I
?⃝
IF ⇐ ,
I ¥ ¥=
a-
&
E E -

" ⇐ ↳ d-
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"

⇐
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 U.su#-apanbaritreindthi.1moingkhaiuhau
THIRD-DEGREE PRICE DISCRIMINATION

◎ If a firm sells in two markets, 1 & 2 (consumer

in different demographic groups)
○ Allocate output (sales) so MR1 = MR2
○ Optimal total output is that for which MRT = MC
◎ For profit-maximization, allocate sales of total
output so that
MRT = MC = MR1 = MR2 D= Dr -1172
t

cdcoinylysécdlduoingcaii chung 14-

 THIRD-DEGREE PRICE DISCRIMINATION

◎ Equal-marginal-revenue principle
○ Allocating output (sales) so MR1 = MR2 which will
maximize total revenue for the firm (TR1 + TR2)
○ More elastic market gets lower price
○ Less elastic market gets higher price Ecco
"#! "#! EK
#(" = !"[ ! " ]; #(% = !☒"[ ! # ] t
" #

# + %! # + %" thinning 1 nhqy

!! [ ] = !! [ ]
%! %" cainvoigia him
14-
 AN EXAMPLE
◎ Suppose the elasticity of demand for Kodak film in the
US is ', = -1.5, and the elasticity of demand in Japan is

I
'- = -2.5.
◎ Marginal cost of manufacturing film is $3.
◎ Determine the profit-maximizing prices?
t É

Put!¥;) the :S NBnha.ycainvotgia.hn

5-
MR:P,
) B- ,
Pu

14-
 THIRD-DEGREE PRICE DISCRIMINATION

Conditions for the pricing strategy to be effective

◎ Differences must exist in the elasticity of demand of
various consumers.

B.
◎ The firm must have some means of identifying the
elasticity of demand by different groups of
consumers
◎ Consumers purchasing at lower prices cannot resell
their purchases to others.
14-
ALLOCATING SALES BETWEEN MARKETS

14-
CONSTRUCTING THE MARGINAL REVENUE CURVE

14-
PROFIT-MAXIMIZATION UNDER THIRD-
DEGREE PRICE DISCRIMINATION

14-
 TWO-PART PRICING
◎ Two-part pricing: Pricing strategy in which consumers
are charged a fixed fee for the right to purchase a
product, plus a per-unit charge for each unit purchased.
○ Example: Athletic club memberships.

14-
 “
Two-Part Pricing:
A firm can enhance profits by engaging in two-
part pricing: charge a per-unit price that equals
marginal cost, plus a fixed fee equal to the
consumer surplus each consumer receives at
this per-unit price.

36
 A NUMERICAL EXAMPLE
Assume that an individual’s inverse demand curve is given
by: P = 20 – 2Q, and the cost function is C(Q) = 2Q. The firm
seeks to find the optimal, profit-maximizing two-part pricing.
Find the optimal price and initiation fee for this product.

A. Mad
fee
zfs.az/.9=MBzgg2--2o-2Q--1Q=g
initiation

14-
 BLOCK PRICING
◎ Block pricing: Pricing
strategy in which
identical products are
packaged together in
order to enhance
profits by forcing
customers to make an
all-or-none decision to
purchase.
E.g. Paper, Six-packs of soda,
Different sized of cans of green
beans. 14-
 AN ALGEBRAIC EXAMPLE
◎ Typical consumer’s ◎ Optimal Quantity To
demand is P = 10 - 2Q Package: 4 Units
◎ C(Q) = 2Q
◎ Optimal number of
units in a package? % 1%21-4×2.4
◎ Optimal package price?
p=MCidlQ=I
units pyo -
g=z→
2.
= 24

" Malmo of
9=4 14-
 AN ALGEBRAIC EXAMPLE
◎ Optimal Price for the ◎ Costs and Profits with
Package: $24 Block Pricing

gijimñcoñglyphaibo
"
rate
sx
'
4 sp

14-
 .hanUhoañhÑ→ÑÑm eµcqratñDN
la-monopol.is/icsTd4raFnhaiinoingdain
“
can
"
.hHanh
can ,

qphaieanbtravh
troñg Block Pricing: By packaging units of a
product and selling them as one package, the hoñnhao
firm earns more than by posting a simple per-
unit price. The profit-maximizing price on a
package is the total value the consumer
receives for the package.

41
avdiadage COMMODITY BUNDLING
- bañdilpaokagegoñi

◎ Commodity Bundling: The practice of bundling several n' sp

'

t-nhauthiipnhai.la
different products together and selling them at a single
“bundle price.”
○ E.g. Vacation packages, Computers and software, Film and
developing.
-3,400 → bridle 3,600

neind-in.hgioiboingoispl.ci 1800 14-

DEMONSTRATION PROBLEM

14-
 PRICING STRATEGIES FOR SPECIAL COST
AND DEMAND STRUCTURES

1. Peak-Load Pricing
2. Cross-subsidization

44
 ÷÷:÷÷÷*
PEAK-LOAD PRICING
*
◎ Peak-load Pricing:
Pricing strategy in
which higher prices
are charged during
peak hours than
O
f
during off-peak hours.
O
0
me
services
grab
0 14-
 “
Peak-Load Pricing: When demand is higher
at some times of the day than at other times,
a firm may enhance profits by peak-load
pricing: charging a higher price during peak
times than is charged during off-peak times.

46
“

47
 CROSS-SUBSIDIES PRICING
◎ Principle: Whenever the demands for two products
produced by a firm are interrelated through costs or
demand, the firm may enhance profits by cross-
subsidization: selling one product at or below cost and
the other product above cost.
○ E.g.: Browser and server software, Drinks and meals at restaurants.

dink
;HÉñ 14-
EXAMPLE
◎ The demand for electricity is Q =5-P in peak periods and Q =4-2P
in off-peak periods. Both periods take up half of each day.
Variable cost is 0.25 per unit of output per period and capital cost
capacity are 0.75 per unit of capacity per day. Capacity costs are
sunk and cannot be adjusted between periods
◎ Find the optimal capacity, peak price and off-peak price

14-
 CONCLUSION
→ full information
◎ First degree price discrimination, block pricing,
and two part pricing permit a firm to extract all
consumer surplus.
◎ Commodity bundling, second-degree and third
degree price discrimination permit a firm to
extract some (but not all) consumer surplus.
◎ Simple markup rules are the easiest to implement,
but leave consumers with the most surplus and
may result in double-marginalization.
◎ Different strategies require different information.
14-
 ANSWERING THE headLINE
Why does Disney World charge a cover fee for entering the
park and then let everyone who enters ride for free? The
answer lies in the ability to extract consumer surplus by
engaging in two-part pricing. In particular, the marginal
cost of an individual ride at an amusement park is close to
zero, as in Figure. If the average consumer has a demand
curve like the one in Figure, setting the monopoly price
would result in a price of $10.50 per ride. Since each
customer would go on five rides, the amusement park
would earn $52.50 per customer. (This ignores fixed costs,
which must be paid regardless of the pricing strategy.) But
this would leave the average consumer with $26.25 in
consumer surplus. By charging an entry fee of $105 but
pricing each ride at $0, each consumer rides an average of
10 rides and the park extracts all consumer surplus and
earns higher profits
14-
2. making qua ñgcao
air suits rien thin oho

Advertising policies
in business
1. Advertisement and its roles
2. Economic analysis of advertising in business

52
 ADVERTISEMENT
◎ Definition: expenditure undertaken by a firm to
promote the sales of its products or services.
○ E.g.: paid-for space in print, radio or television media;
promotional activity
◎ Advertising is intended to influence consumer
choice in favor of the advertiser’s product or
service.

14-
 '

ga
cant "
Graphical Analysis of Advertising
""

capignhqy
#
their " 't
cain gasp
chirac¥9! Extnémsii
↳ rÉ
'm
ca
nhqy
✗µ
Qctyieiihoñ
twin
14-
 OPTIMAL ADVERTISING DECISIONS
◎ To maximize these profits, managers should
advertise up to the point where the incremental
revenue from advertising equals the incremental cost
○ Incremental cost of advertising: the dollar cost of the
resources needed to increase the level of advertising (e.g.:
fees paid for additional advertising space)
○ Incremental revenue: the extra revenue the firm gets as a
result of the advertising campaign. -1 EA
competition
saisphaihtro.mg perfect that
14-
 OPTIMAL ADVERTISING DECISIONS
Formula: The Profit-Maximizing Advertising-to-Sales
Ratio.
! !%&'()*+*,- './+)*0*)1 23 %'4/,% ('# )
=
"# "(*0' './+)*0*)1 23 %'4/,% ('$ )
# '. %()*
Or: = = 7'#
%& '/ %
thi KH aeñg I
◎ Where: %"# = &'() nhiui
'

& G- thais cho di minh QC a' mints

'

sp ai
runa

◎ The more elastic the demand for a firm’s product, the lower the
optimal advertising-to-sales ratio.
◎ The greater the advertising elasticity, the greater the optimal
advertising-to-sales ratio e-Mep 14-
_¥t,=¥o=2%
-1100min UYD -1
Itrvaooe
DEMONSTRATION PROBLEM

Corpus Industries produces a product at constant

marginal cost that it sells in a monopolistically
competitive market. In an attempt to bolster profits, the
manager hired an economist to estimate the demand for
its product. She found that the demand for the firm’s
product is log-linear, with an own price elasticity of
demand of –10 and an advertising elasticity of demand of
0.2. To maximize profits, what fraction of revenues should
the firm spend on advertising?
14-
3.
Investment policy
in business
Investment appraisal in business
1. Investment with risk and uncertainty

58
 BASIC STEPS IN INVESTMENT APPRAISAL
1. Defining the objectives: decide the type of investment
projects.
○ Replacement investment: old equipment has to be replaced
○ Expansionary investment: firm expands its capacity to meet
growing demand
○ Other investments: health and safety or environmental
reasons.
2. Identifying options: consider the various ways in which
the objective might be met.
3. Identifying the costs, benefits, timing and uncertainties
of each option.
14-
 BASIC STEPS IN INVESTMENT APPRAISAL
4. Choosing the method of appraisal: discounted
cash flow techniques, internal rate of return,
payback or the accounting rate of return
5. Choosing the cost of capital: to choose a value to
represent the opportunity cost of the resources
6. Test of viability: whether projects are individually
worth while and ranked in order of merit.
7. Presenting the results: The present value of each
of the projects should be presented to the
decision makers
14-
 AN INVESTMENT EXAMPLE
◎ Step 1: An electricity supplier has decided to build
a new power station
◎ Step 2: The alternative technologies available
should be considered +quay lai tool present value
◎ Step 3: Costs of undertaking each alternative
.

plan, variable costs of producing electricity,

expected revenues, anticipated life of the
project (25 years for a power station), costs in
closing the power station
○ Estimating the cash flows of a project: capital costs,
○ operating costs, revenues and decommissioning costs
14-
 AN INVESTMENT EXAMPLE
◎ Step 4: Choosing the method of appraisal:
○ Discounted cash flow techniques (NPV)
○ Internal Rate of Return (IRR)
○ Payback
○ Accounting rate of return

14-
 “
Rules to choose project
Discounted cash flow techniques (NPV):
1. Projects have positive NPV should all be undertaken
2. Projects having a negative NPV should be rejected
3. Projects have higher NPV should be preferred

63
14-
14-
 INTERNAL RATE OF RETURN (IRR)

◎ The rate of discount that makes the NPV of

the cash flow of a project equal to zero.
◎ Projects with higher IRR are preferred.

14-
 DEMONSTRATION PROBLEM

◎ According to the IRR method, which project if preferred?

14-
 PAYBACK METHOD

◎ Calculates the time in years or months that

projects have to run before they cover their
original capital outlay
◎ Criticisms:
○ It does not discount the cash flows.
○ It ignores all returns after the payback period

14-
 THE ACCOUNTING RATE OF RETURN

◎ Formula:
,-./0 12. 3/45 62.7614
÷ Initial capital outlay
879:26 -; <2/64
◎ Firm should undertake all projects that
have a rate of return greater than the firm’s
cost of capital
◎ This method takes into account all the cash
flows but ignores their time pattern
14-
NON-DISCOUNTING METHODS OF INVESTMENT APPRAISAL
◎ Payback method
◎ Accounting rate of return.

14-
 SUMMARY

◎ 4 methods of investment appraisal:

○ Discounting methods:
◉ Net present value (NPV)
◉ Internal rate of return (IRR)
○ Non-discounting methods:
◉ Payback method
◉ The accounting rate of return

14-
 PROJECTS RANKING AND CAPITAL RATIONING

◎ Many firms restrict their capital budget to a

given sum of money
◎ Recommended rule: projects should be
ranked by the ratio of net cash flow to
initial capital expenditure
N') 0/+ℎ 3.2E
Initial capital expenditure
14-
DEMONSTRATION PROBLEM

14-
 SUMMARY

1. Pricing strategies:
a) Basic pricing strategies
◉ Monopoly & Monopolistic Competition
◉ Cournot Oligopoly
b) Strategic pricing for greater profits
◉ Price Discrimination o Two-part pricing
◉ Block Pricing o Commodity Bundling
c) Pricing strategies for special structure of cost and
demand structures
◉ Peak-Load Pricing o Transfer Pricing
◉ Cross Subsidies
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 SUMMARY

2. Optimal advertising decision:

○ The incremental revenue from advertising equals
the incremental cost
0 3$ 1$&4
○ 12
= 3%
= 1
&+0

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 SUMMARY

3. Methods of investment appraisal:

a) Discounting methods
◉ Net present value (NPV)
◉ Internal rate of return (IRR)
b) Non-discounting methods
◉ Payback method
◉ The accounting rate of return

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 PRACTICE
Using the following data for project A and B:
◎ Calculate the net present value for each project, assuming a cost of capital
of 15%.
◎ Calculate the internal rate of return for each project.
◎ Which project should the firm choose based on using net present value and the
internal rate of return?
◎ If the cost of capital were to increase to 20%, would project A or B be preferred?

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Thank you for
your listening!
Any questions?

You can find me at:

an.vohoangkim16@gmail.com
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