Reference no: EM131380601
GM wants to determine whether to give a $1,000 incentive this year to buyers of Chevy Malibus. Here is relevant information for the base case:
¦ Year 1 price: $20,000
¦ Year 1 cost: $16,000
¦ Each year 30 percent of the market buys a Malibu or a car from the competition.
¦ Seventy percent of people who last bought a Malibu will make their next purchase a Malibu.
¦ Twenty-five percent of people who last bought a car from the competitor will make their next purchase a Malibu.
¦ Inflation is 5 percent per year (on costs and price).
¦ Currently 50 percent of the market is loyal to Malibu, and 50 percent is loyal to the competition.
¦ Profits are accrued at the beginning of the year and are discounted at 10 percent per year. GM is considering giving a $1,000 incentive to any year 1 purchaser. The only change in the base numbers are as follows:
¦ The percentage of the market buying a Malibu or a car from the competition in year 1 will increase by between 2 percent and 10 percent.
¦ The fraction of loyal people who will make their next purchase in year 1 a Malibu will increase by between 5 percent and 15 percent.
¦ The fraction of non-loyal people who will make their next purchase in year 1 a Malibu will increase by between 6 percent and 13 percent.
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