Scribd
Upload
748 views7 pages

Chapter 6 Trips Logistics Example

- Tripps Logistics is deciding between signing a 3-year lease for warehouse space or obtaining space from the spot market as needed. - A decision tree models demand uncertainty and analyzes the expected profits of each option. - The expected NPV of using the spot market is $5,471. The expected NPV of the 3-year lease is higher at $38,364. - A flexible lease option allowing usage between 60,000-100,000 sq. ft. has the highest expected NPV of $46,545.

Uploaded by

asif ali
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
748 views7 pages

Chapter 6 Trips Logistics Example

- Tripps Logistics is deciding between signing a 3-year lease for warehouse space or obtaining space from the spot market as needed. - A decision tree models demand uncertainty and analyzes the expected profits of each option. - The expected NPV of using the spot market is $5,471. The expected NPV of the 3-year lease is higher at $38,364. - A flexible lease option allowing usage between 60,000-100,000 sq. ft. has the highest expected NPV of $46,545.

Uploaded by

asif ali
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 7

Tripps Logistics Example

Demand = 100,000 units


1,000 sq. ft. of space for every 1,000 units of demand
Revenue = $1.22 per unit of demand
Sign a three-year lease or obtain warehousing space on the
spot market?
Three-year lease cost = $1 per sq. ft.
Spot market cost = $1.20 per sq. ft.
k = 0.1
Expected annual profit if warehouse space is obtained from the
spot market =
(100,000 x $1.22) (100,000 x $1.20) = $2,000

Expected annual profit with three year lease =


(100,000 x $1.22) (100,000 x $1.00) = $22,000

NPV of signing lease is $60,182 $5,471 = $54,711


higher than spot market

Tripps Logistics Decision Tree


Three warehouse lease options
Get all warehousing space from the spot market as needed
Sign a three-year lease for a fixed amount of warehouse
space and get additional requirements from the spot market
Sign a flexible lease with a minimum charge that allows
variable usage of warehouse space up to a limit with
additional requirement from the spot market
1000 sq. ft. of warehouse space needed for 1000 units of
demand
Current demand = 100,000 units per year
Binomial uncertainty: Demand can go up by 20% with
p = 0.5 or down by 20% with 1 p = 0.5
Lease price = $1.00 per sq. ft. per year
Spot market price = $1.20 per sq. ft. per year
Spot prices can go up by 10% with p = 0.5 or down by 10%
with 1 p = 0.5
Revenue = $1.22 per unit of demand
k = 0.1

Analyze the option of not signing a lease and using the


spot market
Start with Period 2 and calculate the profit at each node
For D = 144, p = $1.45, in Period 2:
C(D = 144, p = 1.45,2)= 144,000 x 1.45= $208,800

P(D = 144, p = 1.45,2)= 144,000 x 1.22


C(D = 144, p = 1.45, 2) = 175,680 208,800 = $33,120
Expected profit at each node in Period 1 is the profit
during Period 1 plus the present value of the expected
profit in Period 2
Expected profit EP(D =, p =, 1) at a node is the
expected profit over all four nodes in Period 2 that may
result from this node
PVEP(D =, p =, 1) is the present value of this expected
profit and P(D =, p =, 1), and the total expected profit,
is the sum of the profit in Period 1 and the present value
of the expected profit in Period 2
From node D = 120, p = $1.32 in Period 1, there are
four possible states in Period 2
Evaluate the expected profit in Period 2 over all four
states possible from node D = 120, p = $1.32 in Period
1 to be
EP(D = 120, p = 1.32,1) =
0.2 x [P(D = 144, p = 1.45,2) + P(D = 144, p = 1.19,2) +
P(D = 96, p = 1.45,2) + P(D = 96, p = 1.19,2)
= 0.25 x [33,120 + 4,320 22,080 + 2,880 = $12,000
The present value of this expected value in Period 1 is
PVEP(D = 120, p = 1.32,1) =
EP(D = 120, p = 1.32,1) / (1 + k) = $12,000 / (1.1) =
$10,909
The total expected profit P(D = 120, p = 1.32,1) at node
D = 120, p = 1.32 in Period 1 is the sum of the profit in

Period 1 at this node, plus the present value of future


expected profits possible from this node
P(D = 120, p = 1.32,1) = 120,000 x 1.22 120,000 x 1.32 +
PVEP(D = 120, p = 1.32,1) = $12,000 $10,909 =
$22,909
For Period 0, the total profit P(D = 100, p = 120,0) is
the sum of the profit in Period 0 and the present value
of the expected profit over the four nodes in Period 1
EP(D = 100, p = 1.20,0) = 0.25 x [P(D = 120, p = 1.32,1) +
P(D = 120, p = 1.08,1) + P(D = 96, p = 1.32,1) +
P(D = 96, p = 1.08,1)] = 0.25 x [22,909 + 32,073
15,273) + 21,382] = $3,818
PVEP(D = 100, p = 1.20,1)= EP(D = 100, p = 1.20,0) / (1 + k)
= $3,818 / (1.1) = $3,471
P(D = 100, p = 1.20,0)= 100,000 x 1.22 100,000 x 1.20 +
PVEP(D = 100, p = 1.20,0)= $2,000 + $3,471 = $5,471
Therefore, the expected NPV of not signing the lease and
obtaining all warehouse space from the spot market is
given by NPV(Spot Market) = $5,471
Fixed Lease Option
Using the same approach for the lease option,
NPV(Lease) = $38,364

Recall that when uncertainty was ignored, the NPV for


the lease option was $60,182
However, the manager would probably still prefer to
sign the three-year lease for 100,000 sq. ft. because this
option has the higher expected profit
Node
D
12000
0
12000
0
80000

EP(D=,p=, Warehou P(D=,p=,


1)
se Space 1)

P
1.3
2
1.0
8
1.3
2
80000 1.0
8

$17,360

20000

$35,782

$22,640

20000

$45,382

($2,400)

($4,582)

($2,400)

($4,582)

Flexible Lease Option


Node
D
12000
0
12000
0
80000

EP(D=,p=, Warehou P(D=,p=,


1)
se Space 1)
P
1.3 $19,360
2
1.0 $24,640
8
1.3 $17,600

100000

$37,600

100000

$47,200

80000

$33,600

2
80000 1.0 $17,600
8

80000

$33,600

Using the same approach for the lease option,


NPV(Flexible Lease) = $56,545
With an upfront payment of $10,000 the net expected
profit is $46,545

For all Lease options then:


Option
All warehouse space from the spot market

Value
$5,471

Lease 100,000 sq. ft. for three years

$38,364

Flexible lease to use between 60,000 and


100,000 sq. ft.

$46,545

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy