Assignment task: GrantD, a manufacturer of auto parts, is considering two business-to-business (B2B) marketplaces to purchase its maintenance, repair, and operating (MRO) supplies. The first marketplace, Playparts, sells all of its products with a 6% commission added on top of the price of the product. The second marketplace source.com's pricing is based on a one-time subscription fee of $7 million that must be paid upfront for a two-year period and a commission of 1% added on top of the price of each product. Assume that GrantD will choose one of these marketplaces; they cannot be used together. GrantD must make this decision for a two-year time horizon. GrantD spends about $120 million on MRO supplies each year, although this varies. First-year, there is a 65% chance that GrantD MRO spending will stay at $120 million and a 20% chance that their spending will drop by 15%. In the second year, there is a 60% chance that the spending level will stay where it was in the first year and a 40% chance that it will drop by 12% from its first-year value. GrantD has an annual discount rate of 20%
a) Use a decision tree to determine whether GrantD should use Playparts or source (website) as its marketplace. Report the expected net present value (NPV) of costs for each option.
b) If your answer to part a) is "GrantD should use Playparts" then what is the maximum commission fee percentage they would be willing to pay to Playparts.com? Alternatively, if your answer is "GrantD should use source.com", then what is the maximum one-time subscription fee they would be willing to pay to source website (assume that source commission fee will be fixed at 1%)?