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HUME WORK SET# VI MANAGING ECONOMIC (COMPETITIVE) EXPOSURE The Atlas Corp. of the United States exports computer software to the euro zone. Sales are currently 1,200,000 units per year at the euro equivalent of $136 each. The current exchange rate is $1.1324/ but the euro is expected to depreciate in a couple of days by 11.24% after which it will remain unchanged for at least ten years. Accepting this forecast, Atlas Corp. faces a pricing decision in anticipation of the appreciation. It may either 1) maintain the same euro price and in effect sell for fewer dollars, in which case its export volume will increase by 12% per year for the first six years and then by 7% per year for the following four years, or 2) maintain the same dollar price, raise the euro price in Europe to compensate for the depreciation, and experience a 30% drop in volume during the current year, followed by an increase by 2% per year for the following nine years. Dollar costs will not change. At the end of ten years, the software will be obsolete and will no longer be exported. After the euro depreciates by 11.24% no further appreciation is expected. Direct costs are currently 72% of the U.S. sales price and that cost will not change over the ten-year horizon. Atlas' weighted average cost of capital is 12%. Given these considerations... 1. Which pricing policy should Atlas follow? 2. Explain your decision and comment on the implications of the result from the point of view of competitive exposure. HUME WORK SET# VI MANAGING ECONOMIC (COMPETITIVE) EXPOSURE The Atlas Corp. of the United States exports computer software to the euro zone. Sales are currently 1,200,000 units per year at the euro equivalent of $136 each. The current exchange rate is $1.1324/ but the euro is expected to depreciate in a couple of days by 11.24% after which it will remain unchanged for at least ten years. Accepting this forecast, Atlas Corp. faces a pricing decision in anticipation of the appreciation. It may either 1) maintain the same euro price and in effect sell for fewer dollars, in which case its export volume will increase by 12% per year for the first six years and then by 7% per year for the following four years, or 2) maintain the same dollar price, raise the euro price in Europe to compensate for the depreciation, and experience a 30% drop in volume during the current year, followed by an increase by 2% per year for the following nine years. Dollar costs will not change. At the end of ten years, the software will be obsolete and will no longer be exported. After the euro depreciates by 11.24% no further appreciation is expected. Direct costs are currently 72% of the U.S. sales price and that cost will not change over the ten-year horizon. Atlas' weighted average cost of capital is 12%. Given these considerations... 1. Which pricing policy should Atlas follow? 2. Explain your decision and comment on the implications of the result from the point of view of competitive exposure