36) A negative NPV (net present value) for an option indicates that the option will
A) gain money for the supply chain.
B) lose money for the supply chain.
C) maximize profit for the supply chain.
D) minimize profit for the supply chain.
37) The decision with the highest NPV (net present value) will provide a supply chain with
A) the highest financial return.
B) the lowest financial return.
C) a reasonable financial return.
D) the least desirable financial return.
38) What rate of return results in a present value of $23 for $25 received one year from now?
A) 7.8%
B) 8.1%
C) 8.4%
D) 8.7%
39) What rate of return results in a present value of $432 for $250 received one year from now
and another $250 received two years from now?
A) 9.89%
B) 10.32%
C) 10.94%
D) 11.37%
40) The NPV (net present value) of a cash stream that is equal to $100 per period for 5 periods
with a rate of return of 12% per period would be
A) $360.48.
B) $382.98.
C) $403.73.
D) $416.51.
41) The NPV (net present value) of a cash stream that is equal to $75 per period for 5 periods
with a rate of return of 15% per period would be
A) $251.41.
B) $289.12.
C) $312.74.
D) $322.44.
42) In reality, demand and prices are
A) highly certain and not likely to fluctuate during the life of any supply chain decision.
B) highly certain and likely to fluctuate during the life of any supply chain decision.
C) highly uncertain and not likely to fluctuate during the life of any supply chain decision.
D) highly uncertain and likely to fluctuate during the life of any supply chain decision.
43) For a global supply chain, exchange rates and inflation are
A) likely to vary over time in different locations.
B) not likely to vary over time in different locations.
C) not likely to vary over time in any locations.
D) likely to be stable over time in all locations.
44) A decision tree is
A) a graphic device used to evaluate decisions under certainty.
B) a graphic device used to evaluate decisions under uncertainty.
C) a tabular device used to evaluate decisions under certainty.
D) a tabular device used to evaluate decisions under uncertainty.
45) Decision tree analysis is based on Bellman’s principle, which states that for any choice of
strategy in a given state,
A) the optimal strategy is the one that is selected if the entire analysis is assumed to begin in the
first period.
B) the optimal strategy is the one that is selected if the entire analysis is assumed to begin in the
last period.
C) the optimal strategy in the next period is the one that is selected if the entire analysis is
assumed to begin in the last period.
D) the optimal strategy in the next period is the one that is selected if the entire analysis is
assumed to begin in the next period.
46) Uncertainty in demand and economic factors should be included in the financial evaluation
of supply chain design decisions because
A) the exclusion of certainty may have a significant impact on this evaluation.
B) the exclusion of uncertainty will not have a significant impact on this evaluation.
C) the inclusion of certainty may have a significant impact on this evaluation.
D) the inclusion of uncertainty may have a significant impact on this evaluation.
47) Flexibility should be valued by taking into account uncertainty in demand and economic
factors. In general, flexibility will tend to
A) decrease in value with a decrease in certainty.
B) increase in value with an increase in uncertainty.
C) decrease in value with an increase in uncertainty.
D) increase in value with an increase in certainty.
48) The appropriate discount rate used in decision tree methodology
A) should be risk-adjusted, and risk may vary by period and decision node.
B) should be risk-adjusted, and risk may not vary by period and decision node.
C) should not be risk-adjusted, and risk may vary by period and decision node.
D) should not be risk-adjusted, and risk may not vary by period and decision node.
49) Firms should use simulation for evaluating decisions when
A) underlying decision trees are simple and explicit solutions for the underlying decision tree are
difficult to obtain.
B) underlying decision trees are very complex and explicit solutions for the underlying decision
tree are difficult to obtain.
C) underlying decision trees are simple and explicit solutions for the underlying decision tree are
easy to obtain.
D) underlying decision trees are very complex and explicit solutions for the underlying decision
tree are easy to obtain.
50) In a complex decision tree there are
A) only a few possible paths that may result from the first period to the last.
B) less than thirty possible paths that may result from the first period to the last.
C) thousands of possible paths that may result from the first period to the last.
D) an infinite number of possible paths that may result from the first period to the last.
51) Short-term contracts for both warehousing and transportation requirements will be more
effective
A) if the demand and price of warehousing do not change in the future.
B) if the price of warehousing goes up in the future.
C) if either demand or the price of warehousing drops in the future.
D) only if demand drops in the future.
52) The degree of demand and price uncertainty has
A) no effect on the appropriate portfolio of long- and short-term warehousing space that a firm
should carry.
B) a limited influence on the appropriate portfolio of long- and short-term warehousing space
that a firm should carry.
C) a minor influence on the appropriate portfolio of long- and short-term warehousing space that
a firm should carry.
D) a significant influence on the appropriate portfolio of long- and short-term warehousing space
that a firm should carry.
53) Uncertainty of demand and price
A) drives the value of building flexible production capacity at a plant.
B) eliminates the value of building flexible production capacity at a plant.
C) facilitates the value of building flexible production capacity at a plant.
D) has no effect on the value of building flexible production capacity at a plant.
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Scenario 6.1 — The Big Box
Bahouth Ltd. is planning for the next two years of production and debating whether to construct
a large cross-dock facility with 40 truck bays or a smaller one with 20 truck bays. The cost to
build the large facility is $2 million and the cost to build the small one is $1.2 million. If they
construct a large facility and demand is as high as they hope, then operating costs are $450,000
annually. If they construct a large facility and demand is low, then operating costs are $300,000.
If they construct a small facility and demand is low, the operating costs are $275,000 but if they
experience high demand, the operating cost of a small facility increases to $600,000. After
having conducted some market research, they feel that the likelihood of high demand is 0.7 and
the likelihood of small demand is 0.3.
54) Use the information from Scenario 6.1 to determine the expected cost of operating a large
facility for two years.
A) $810,000
B) $450,000
C) $405,000
D) $2,810,000
55) Use the information from Scenario 6.1 to determine the expected cost of operating a small
facility for a period of two years.
A) $1,102,500
B) $1,005,500
C) $502,500
D) $2,205,000
56) Use the information from Scenario 6.1 to determine the total (operating and building) cost of
the best alternative for a two year period.
A) $2,000,000
B) $1,200,000
C) $2,205,000
D) $2,810,000
57) Use the information from Scenario 6.1 to determine the likelihood of high demand that
would make the decision maker indifferent between the two alternatives for a two-year operating
time.
A) 0.86
B) 0.72
C) 0.28
D) 0.14
58) Suppose the contractor has found some materials on Craigslist that can drop the construction
cost of a large facility to $1,500,000. These materials cannot be used in the construction of the
small facility, so its price remains as indicated in Scenario 6.1. Determine the likelihood of high
demand that would make the decision maker indifferent between the two alternatives for a two-
year time period.
A) 1.0
B) 0.72
C) 0.92
D) 0.86
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A recently-accredited College of Business discovers it is in dire financial trouble and wants to
examine demand for services and costs to provide them next year. Market conditions may
become more favorable, resulting in a 10% increase in enrollment, with a probability of 0.5, stay
the same, with a probability of 0.3, or become less favorable, with a probability of 0.2 and a
decrease in enrollment of 10%. There is a 0.9 probability that their costs to provide services will
rise by 5% and a 0.1 probability that their costs will be the same. This year, they charge each of
their 2000 students $3000 to take a full course load and spend $1500 on each student.
59) What is the probability that the college experiences a decrease in enrollment and an increase
in their cost to provide services?
A) 0.45
B) 0.27
C) 0.18
D) 0.02
60) What is the revenue for the college if it experiences an increase in enrollment and an increase
in their cost to provide services?
A) $4,000,000
B) $4,400,000
C) $5,465,000
D) $6,600,000
61) What is the profit for the college if it experiences a decrease in enrollment and an increase in
their cost to provide services?
A) $3,150,500
B) $2,850,000
C) $2,565,500
D) $1,935,000
62) What is the expected profit for the college?
A) $910,550
B) $850,500
C) $765,050
D) $890,950
63) If price and demand do vary over time in a global network,
A) flexible production capacity should not be used in the new environment.
B) flexible production capacity will be ineffective in the new environment.
C) flexible production capacity can be reconfigured to maximize profits in the new environment.
D) flexible production capacity should never be used in an uncertain environment.
64) A firm may choose to build a flexible global supply chain even in the presence of little
demand or supply uncertainty if
A) certainty exists in both exchange rates and prices.
B) certainty exists in exchange rates or prices.
C) uncertainty exists in both exchange rates and prices.
D) uncertainty exists in exchange rates or prices.
65) Simulation models
A) require a higher setup cost to start and operate compared to decision tree tools.
B) require a lower setup cost to start and operate compared to decision tree tools.
C) require a higher setup cost to start but less to operate compared to decision tree tools.
D) require a lower setup cost to start but more to operate compared to decision tree tools.
66) Simulation methods are very good at evaluating decisions when
A) the paths are decision dependent.
B) the decision rules are simple.
C) there are different forms of uncertainty.
D) implicit solutions are needed for analysis.
67) Strategic planning and financial planning
A) should be performed independently during supply chain network design.
B) should be performed sequentially during supply chain network design.
C) should be performed concurrently during supply chain network design.
D) should be combined during supply chain network design.
68) The evaluation of supply chain networks
A) should use only one metric.
B) should use multiple metrics.
C) should not use more than one metric.
D) should be subjective.
69) One of the best ways to speed up the process of financial analysis and arrive at a good
decision is to
A) use estimates of inputs when it appears that finding a very accurate input would take an
inordinate amount of time.
B) use estimates backed up by sensitivity analysis when it appears that finding a very accurate
input would take an inordinate amount of time.
C) use estimates of inputs except when it appears that finding a very accurate input would take
an inordinate amount of time.
D) make sure that every detail is very accurate.
6.3 Essay Questions
1) Pretzle Wagon is evaluating the possibility of offshoring part of his operation and developing
a spreadsheet to help assess the total cost of the decision. What elements should be included in
the evaluation?
2) Briefly describe the three primary risk mitigation strategies based on the idea of flexibility that
supply chain managers can use.
3) The XYZ Company has a choice between two warehouses. A lease at location A costs $1000
per month with a payment of $2000 up front to guarantee the 3 year lease. Location B would cost
$1200 per month and would be leased from month to month. The anticipated revenue in either
location is $1500 per month. The estimated rate of return is 10% per year. Using net present
value, determine which location would be the better choice.
4) Summarize the steps in the decision tree analysis methodology.
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5) Discuss the ideas that managers should consider to make better supply chain network design
decisions under uncertainty.
Answer: Managers should consider the following ideas to help them make better network design
decisions under uncertainty:
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AACSB: Application of knowledge
Objective: LO 6.3: Understand decision tree methodologies used to evaluate supply chain design
decisions under uncertainty.