Problem 1:
Ben Traders, a privately held U.S. metals broker, has acquired an option to purchase one million kilograms of partially refined molyzirconium ore from the Zeldavian government for $5.00 per kilogram. Molyzirconium can be processed into several different products which are used in semiconductor manufacturing, and George Ben, the owner of Ben Traders, estimates that he would be able to sell the ore for $8.00 per kilogram after importing it. However, the U.S. government is currently negotiating with Zeldavia over alleged dumping of certain manufactured goods which that country exports to the United States. As part of these negotiations, the U.S. government has threatened to ban the import from Zeldavia of a class of materials that includes molyzirconium. If the U.S. government refuses to issue an import license for the molyzirconium after Ben has purchased it, then Ben will have to pay a penalty of $1.00 per kilogram to the Zeldavian government to annul the purchase of the molyzirconium.
Ben has used the services of John A. Analyst, a decision analyst, to help in making decisions of this type in the past, and George Ben calls on him to assist with this analysis. From prior analyses, George Ben is well-versed in decision analysis terminology, and he is able to use decision analysis terms in his discussion with Analyst.
Analyst: As I understand it, you can buy the one million kilograms of molyzirconium ore for $5.00 a kilogram and sell it for $8.00, which gives a profit of ($8 00 - $5 00) x 1 000 000 = $3 000 000. However, there is some chance that you cannot obtain an import license, in which case you will have to pay $1.00 per kilogram to annul the purchase contract. In that case, you will not have to actually take the molyzirconium and pay Zeldavia for it, but you will lose $1 00 x 1 000 000 = $1 000 000 due to the cost of annulling the contract.
Ben: Actually, some chance may be an understatement. The internal politics of Zeldavia make it hard for their government to agree to stop selling their manufactured goods at very low prices here in the United States. The chances are only fifty-fifty that I will be able to obtain the import license. As you know, Ben Traders is not a very large company. The $1,000,000 loss would be serious, although certainly not fatal. On the other hand, making $3,000,000 would help the balance sheet.
Which alternative should Ben select?
Note that all of your trees that you built above should include the following considerations if any.
- We use the negative sign (-) for the cost, the expenses, cash outflow, etc.
- We use the positive sign (+) for the revenue, profit, cash inflow, etc.
Problem 2:
This is a continuation of the Ben Traders decision that was discussed in Problem 4. Suppose a source of perfect information existed that would let Ben know if the import license would be issued.
How much money would it be worth to obtain perfect information about issuance of the import license?
Problem 3:
Now consider a potential source of imperfect information in the Ben Traders decision discussed in Problem 4. We continue with the discussion between John Analyst and George Ben.
Analyst: Is there any way of obtaining additional information about the chances of obtaining a license other than waiting and seeing what happens? Perhaps there is something that doesn't take as long as waiting for the import approval.
Ben: Well, there is always Sam S. Lofon. He is a Washington-based business consultant with good connections in the import licensing bureaucracy. For a fee, he will consult his contacts and see if they think the license will be granted. Of course, his assessment that the license will come through is no guarantee. If somebody in Congress starts complaining, they might shut down imports from Zeldavia. They are really upset about this in the Industrial Belt, and Congress is starting to take some heat. On the other hand, even if Lofon thinks the license won't come through, he might be wrong. He has a pretty good record on calling these things, but not perfect. And he charges a lot for making a few telephone calls
Analyst: How good has he been?
Ben: He is done some assessments for me, as well as other people I know. I'd say in cases where the import license was ultimately granted, he called it right 80% of the time. However, he hasn't been so good on the license requests that were turned down. In those cases, he only called it right 65% of the time.
Analyst: You commented earlier that he was expensive. How much would he charge?
Ben: This is a pretty standard job for him. His fee for this type of service is $10,000.
Should Ben hire Loon, and if so, what is the maximum amount that he should pay Lofon for his services?