08 $E The Sweet Tooth Candy Company knows it will need 10 tons of sugar six months from now to implement its production plans. The company has essentially two options for acquiring the needed sugar. It can either buy the sugar at the going market price when it is needed, six months from now. or it can buy a futures contract now. The contract guarantees delivery of the sugar in six months but the cost of purchasing it will be based on today's market price. Assume that possible sugar futures contracts available for purchase are for five tons or ten tons only. No futures contracts can be purchased or sold in the intervening months. Thus, Sweet Tooth's possible decisions are to (1) purchase a futures contract for ten tons of sugar now, (2) purchase a futures contract for five tons of sugar now and purchase five tons of sugar in six months, or (3) purchase all ten tons of needed sugar in six months. The price of sugar bought now for delivery in six months is $0.0851 per pound. The transaction costs for five-ton and ten-ton futures contracts are $65 and $110, respectively. Finally, the company has assessed the probability distribution for the possible prices of sugar six months from now (in dollars per pound). The sheet Question 3 contains the possible prices and thir corresponding probabilities a. Use Precision Tree to identify the decision that minimizes Sweet Tooth's expected cost of meeting its sugar demand 11 0.07 b. Calculate the expected monetary (EMV) for this decision problem and explain the optimal strategy 0.0 c. Perform a sensitivity analysis on the optimal decision, letting each of the three currency in puts vary one at a time plus or minus 25% from its base value and summarize your findings. Which of the inputs appears to have the largest effect on the best decision? B D S0.0851 $65 $110 1 Purchasing sugar 2 3 Inputs 4 Current price of sugar (S/b) 5 Transaction cost for 5-ton futures contract 6 Transaction cost for 10-ton futures contract 7 8 Distribution of price in 6 months 9 Price 10 Probability 11 12 Cost table 13 14 Purchase 10 tons in six months 15 Purchase futures contract for 5 tons now and purchase 5 tons in six months 16 Purchase futures contract for 10 tons now 17 18 19 20 21 $0.078 0.05 $0.083 0.25 $0.087 0.35 $0.091 0.2 $0.096 0.15 Price in 6 months 50.087 $0.078 $0.083 $0.091 $0.096