Ceylon Steel produces steel alloy plates. The firm wants to locate a central distribution center in the
Question:
Ceylon Steel produces steel alloy plates. The firm wants to locate a central distribution center in the northern province of the country that will serve all of its regional centers. The firm evaluated five locations (Jaffna, Kilinochchi, Mannar, Mullaitivu, Vavuniya), and using the center of gravity method narrowed down its choice to Jaffna.The firm's supply chain manager is facing a decision regarding the amount of space to lease for the Jaffna distribution center for the upcoming three-year period. Forecasts indicate that the Jaffna distribution center will need to handle a demand of 100,000 steel alloy plates for each of the next 3 years; thefirm's distribution center requirements are 1,000 square feet of distribution center space for every 1,000 steel alloy plates. The firm receives a revenue of $1.22 for each steel alloy plate. The supply chain manager must decide whether to sign a three-year lease or obtain the distribution center space on the spot/cash market each year (assuming that the only cost that the firm faces is the cost of the distribution center). The three-year lease will cost $1 per square foot per year, and the spot/cash market rate is expected to be $1.10 per square foot per year for each of the three years. The firm has a discount rate of k = 0.2. Should the supply chain manager sign a lease?