978-0134731889 Example Trips Logistics Example

Trips Logistics Example

• Demand = 100,000 units

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

Expected annual profit if warehouse space is obtained from the

spot market (see worksheet Discounted cash flow, Cell B10) =

Expected annual profit with three-year lease (see worksheet

Discounted cash flow, Cell B13) =

Trips Logistics—Decision Tree

Three warehouse lease options:

Other data:

Analyze the option of not signing a lease and using the spot

market (see worksheet Decision Tree – spot market)

For D = 144, p = $1.45, in Period 2 (Cell D5):

• Expected profit at each node in Period 1 is the profit

• For Period 0, the total profit P(D = 100, p = 120,0) is

the sum of the profit in Period 0 and the present value

• Therefore, the expected NPV of not signing the lease and

obtaining all warehouse space from the spot market is

Fixed Lease Option (see worksheet Decision Tree – fixed lease)

• Using the same approach for the lease option,

Flexible Lease Option (see worksheet Decision Tree – flexible

lease)

• Using the same approach for the lease option,

All Lease Options

Option

Value

All warehouse space from the spot market

$5,471

Lease 100,000 sq. ft. for three years

$38,364

Flexible lease to use between 60,000 and

100,000 sq. ft.

$46,545