Problem 5 (10 Points):

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 4 (as reference):

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.