Y5

The National Printing Services (NPS), is a state owned enterprise charged with the responsibility 0f providing printing services to Government. In the past, NPS has not operated as a profit seeking enterprise as its pricing policy was mainly driven by a full-cost recovery objective. Consequently, NPS has of late found itself lacking adequate funding to cover unscheduled costs as well as maintenance expenses for its machinery. NPS has actually sought Government budget support on a consistent basis over the past few years. Because of this weak financial position, it has not been able to plan for replacement or upgrade of its operating machinery. As part of its recently announced austerity measures, Government has finally resolved to restructure NPS into a fully-fledged commercial enterprise providing media designing and printing services to both Government and private clients. With regards the printing services, Government has set aside funds for the procurement and installation of state of the art printing machinery for NPS. The Procurement team is now evaluating the capacity of printing machinery to buy. The decision depends on the size of market NPS will enjoy. "Possibly demand will be high during the initial two years but, if many initial clients find the service unsatisfactory, will fall to low levels thereafter. Or high initial demand might indicate the possibility of a sustained high-volume market". Similarly, low demand in the initial period strongly indicates low demand in the subsequent periods. A large plant will be appropriate for a high demand while a small plant will be appropriate for low demand. The team is uncertain of what to do. If they procure a large plant, NPS has to live with it regardless of the size of the demand. If they procure a small plant, there is an option of expanding it at the end of the two years in the event that demand is high in the introductory period. Forecasts indicate that there is a 70% chance that there will be high demand in the introductory period. For the subsequent periods, there is an 86% chance that demand will be high following a high in the introductory period and a 100% chance it will be low following a low in the introductory period. A large plant with high demand will yield an annual cash income of K1 million but with low demand it will yield K0.100 million because of fixed costs and inefficiencies. On the other hand, a small plant with low demand will yield K0.400 million annually. If the demand is however high, a small plant will yield K0.450 million annually during the introductory period but later drop to K0.300 million in the subsequent years. If the small Page 3 of 7 plant was expanded, it will yield K0.700 million income with high demand and K0.050 million with low demand. The costs of acquisition are estimated at K3 million and K1.3 million respectively for the large and small plants; while the expansion would cost K2.2 million. Required: Being the Decision Analyst in this team, you are required to use the Decision Tree technique to: the decision points and the alternatives available at each point. [05 Marks] b) Identify the points of uncertainty and the range of outcomes at each point. [10 Marks] c) Evaluate the decision situation using the undiscounted expected value approach. [10 Marks] d) Evaluate the decision if you used the discounted expected value approach? [10 Marks] e) Why would it be appropriate to incorporate this approach in this situation? [05 Marks]