hw03-solution - FNCE 3010 (Durham) HW 7 capital budgeting 2...

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FNCE 3010 (Durham) HW 7 — capital budgeting 2 1. In 2003, Porsche unveiled its new sports-utility vehicle (SUV), the Cayenne. With a price tag of over $40,000, the Cayenne goes from zero to 62 mph in 9.7 seconds. Porsche’s decision to enter the SUV market was in response to the runaway success of other high-priced SUVs such as the Mercedes-Benz M-class. Vehicles in this class had generated years of very high profits. The Cayenne certainly spiced up the market, and Porsche subsequently introduced the Cayenne Turbo, which goes from zero to 62 mph in 5.6 seconds and has a top speed of 165 mph. The price tag for the Cayenne Turbo? Almost $100,000! Some analysts questioned Porsche’s entry into the luxury SUV market. The analysts were concerned not only that Porsche was a late entry into the market, but also that the intro- duction of the Cayenne would damage Porsche’s reputation as a maker of high-performance automobiles. (a) In evaluating the Cayenne, would you consider the possible damage to Porsche’s rep- utation to be erosion? (b) Porsche was one of the last manufacturers to enter the sports-utility vehicle market. Why would one company decide to proceed with a product when other companies, at least initially, decide not to enter the market? (c) In evaluating the Cayenne, what do you think Porsche needs to assume regarding the substantial profit margins that exist in this market? Is it likely they will decline as the market becomes more competitive, or will Porsche be able to maintain the profit margin because of its image and the performance of the Cayenne?
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hw03-solution - FNCE 3010 (Durham) HW 7 capital budgeting 2...

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