Current Demand (D) =100,000 units per year; 1000 square feet of warehouse space is required for...
- Current Demand (D) =100,000 units per year;
- 1000 square feet of warehouse space is required for every 1000 units.
- Current spot market price (p)=$1.20 per sq. ft. per year;
- Discount rate (k)=0.1,
- Revenue = $1.25 per unit of demand
- Two-year plan: Next year the demand (D) may go up by 20% with probability of 0.6 or go down by 20% with probability of 0.4. Similarly, the spot price (p) may go up by 10% with probability of 0.7 and go down by 10% with probability of 0.3.
- Draw the decision tree with periods 0 and 1 for this case scenario with the corresponding probabilities on each branch of the tree. Also, please provide demand and spot prices on each node,
- Calculate the expected profit that the company will make for a two-year plan by only buying at the spot market. Spot Market ONLY. No flexible lease.
Homework Answers
Decision Tree:
Expected Annual Profit = Total revenue per unit - Total cost at spot price
= (1,00,000*$1.25- 1,00,000*$1.2) = $5,000
Profit for two year = $5,000*2 = $10,000
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