Mutually Exclusive Projects
FINA 635A
Managerial Finance
Nisan Langberg
Web-App pricing
A firm has developed an Application for cellular phones. It is basically ready to go – the investment has been made. The firm, however, does not know for what price it should offer the application. It estimates that if it offers it for a price of $10 then no one will buy it…too expensive. But, if it offers it for a lower price then more people will buy it. Actually it is estimated that in order to sell to Q consumers the price must be exactly Price=$(10-0.1Q). So, for example, in order to sell to 50 consumers the price must be $5 and to sell to 75 consumers the price must be $2.5, and so on. At most 100 consumers will be interested in buying this application. In additional to the selling price, the firm estimates that from each consumer that buys the app the application will yield annual cash flows of $1 from in-app purchases by that consumer for the next five years. Suppose that the cost of capital for this firm is 20% to finance this project.
0as a consumerou prefer?g price? What governemnt e selling of apps ( app sales e app price for each app purchased?
ith Alon Ravi / (a)  At what price should the firm sell its app?
(b)  What is the NPV/IRR of the project if the app required an upfront investment of $500?
(c)  How would your answer to (a) change if the government offered a special plan with 0% financing for developing apps?
(d) What if the government instead waived corporate tax on the selling of apps (not on in-app purchases) such that firms earned 35% more on their selling price? What government policy would you prefer as a consumer? App developer?