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1. Logistics Manager of a firm has a decision to make in which he has to evaluate the prevailing Spot Market option with the

  

1. Logistics Manager of a firm has a decision to make in which he has to evaluate the prevailing Spot Market option with the following details: His demand forecast says that he would be needing 50,000 square feet for every 50,000 tons sold in the market. Using a multiplicative binomial representation both for price and space cost to account for uncertainty. His study says, the demand may go up by 10% or may come back down with the same with the probability of both outcomes remaining the same i.e. 50% each Also, his space cost (USD 1.5/SqFt for spot market would increase or decrease with 10% every year with a probability of 50% for each outcome. Selling Price per unit is USD 2 per unit. Construct a decision tree for a period of 2 years and show every possible outcome in the same. Also discount back any 4 nodes from period 2 into their respective point of initiations (period 1) to arrive calculate NPV through Spot Market Option. Assumption is that in the final year the value of k is 10% & in the first year it stands at 5%. (8) Q2. Using the data in question 2, referring to the same tree diagram as drawn in Q1, the manager also wants to evaluate a Fixed Lease option, wherein, The Signed Lease Rate is USD 1.20/SqFt. All other variations in demand and Spot Cost to remain the same as defined in Q1. Calculate NPV using Fixed Lease Option. (6) Q3. Also, The Manager also wants to evaluate The Flexi Lease Option, wherein, by paying an upfront cash of USD 10,000, he has the flexibility of using between 40,000 feet till 50,000 sq feet and pay on actual usage. Using the same decision tree again (as done in Q1) and calculate NPV by using Flexi Lease Option. (6)

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