Valuation and Capital Budgeting

In 2003, Porsche unveiled its new sports utility vehicle (SUV), the Cayenne. With the 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 Cayenne Turbo S, which goes from 0 to 60 mph in 4.8 seconds and has a top speed of 168mph. The base price for 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 high-performance automobiles.

Q1. In evaluating the Cayenne, would you consider the possible damage to Porsche's reputation as erosion?

Q2. Porsche was one of the last manufacturers to enter the sports utility vehicle market. Why would one company decide proceed with a product when other companies, at least initially, decide not to enter the market?

Q3. In evaluating the Cayenne, what do you think Porsche needs to assume regarding the substantial profit margins that exist in the 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 Cayenne?