To answer the next three questions, refer to the following example. 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 8.5 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, in 2006, Porsche introduced the Cayenne Turbo S, which goes from zero to 60 mph in 4.8 seconds and has a top speed of 168 mph. The base price for the Cayenne Turbo S in 2011? Almost $105,000!
Some analysts questioned Porsche’s entry into the luxury SUV market. The analysts were concerned because not only was Porsche a late entry into the market, but also the introduction of the Cayenne might damage Porsche’s reputation as a maker of highperformance automobiles.
Capital Budgeting 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 that they will be maintained 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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