Assignment # 1

MC190205134
Q1. Draw a Decision tree diagram given the above conditions.

D = 240

P = 220

D = 240

P = 180

D¿ 200 ( ± 0.2 )

P = 20 ( ± 0.1 ) D = 160

P = 220

D = 160

P = 180

Q2. Calculate the profits at each node of the Period T=1.

S# Nodes Revenue Cost Profit

1 D = 240 2,40,000 * 400 = 96,000,000 2,40,000 * 22 = 5,280,000 90,720,000
P = 22
2 D = 240 2,40,000 * 400 = 96,000,000 2,40,000 * 18 = 4,320,000 91,680,000
P = 18
3 D = 160 1,60,000 * 400 = 64,000,000 1,60,000 * 18 = 2,880,000 61,120,000
P = 18
4 D = 160 1,60,000 * 400 = 64,000,000 1,60,000 * 22 = 3,520,000 60,480,000
P = 22
Q3. Calculate the total profit at T=0 using a discounted cash flow analysis (Net Present Value)
with a hurdle/discount rate of 10%.

Demand = 200000 units

1,000 sq. ft. of space for every 1,000 units of demand

Revenue = 400 per unit of demand

Sign a three-year lease or obtain warehousing space on the spot market?

Three-year lease cost = 10 per sq. ft.

Spot market cost = 20 per sq. ft.

k = 0.1

Expected annual profit if warehouse space is obtained from the spot market

As we know that

Expected annual profit = Revenue - Cost

= 200,000 x 400 – 200,000 x 20 = 80000000 – 4000000 = 76000000

So Cash flow = PKR 76000000/-

In the given scenario, we have

T=0

We need to find net cash flow with the help of below formula

 C1   C2 
C0    2
NPV =  (1  K )   (1  K ) 

NPV = 76000000 + (0) + (0)

NPV = 76000000