Supply Chain Management 6th Edition: Sunil Chopra, Peter Meindl.
Your company is planning to lease warehouse space on the spot market for the next two years. Each product unit requires 2.69 square feet of warehouse space, the product sale price is $9 per unit and the discount rate for the company is 0.16. Neither space required, product sale price nor discount rate will change for the first two years of operations.
The details for their first year of operations are as follows:
1. Demand is 75,000 units
2. Warehouse space spot market pricing is $.40 per square foot per year
The following uncertainty exists for the second year of operations:
1. Demand may increase by 13% with a probability of .75 or may decrease by 8% with a probability of .25
2. Warehouse space spot market pricing may increase by 9% with a probability of .60 or may decreease by 3% with a probability of .40
Assume warehouse space for an entire year's worth of demand is requried to be leased each year
Assume all costs are paid and all revenues are received on the first day of each of the next two years
Assume today is the first day of the first year (current year)
Using decision tree methodology with net present value methodology, determine the Expected Profit of two years of operations where warehouse space is leased on the spot market.