H7a-3. Use a decision tree to model Trip Logistics' option to not sign a lease and thus get all warehousing space from the spot market as needed with the following modifications: The planning horizon is 2 years (not 3 as used in our book) 1000 sq. ft. of warehouse space needed for 1000 units of demand Current demand = 100,000 units per year Binomial uncertainty: Demand (D) can go up by 15% with probability p = 0.5 or down by 10% with 1-p = 0.5 Lease price = $1.00 per sq. ft. per year Spot market price (S) = $1.20 per sq. ft. per year Spot prices can go up by 10% with p = 0.5 or down by 7% with 1-p=0.5 Revenue = $1.22 per unit of demand k= 0.05 (rate of return) What is the expected NPV of not signing the lease? What is the expected NPV if the rate of return k = 0.10? That is, re-evaluate the decision tree with k = 0.10. Hint: the decision tree should look like this; then add the payoffs and compute the expected NPV of not signing the lease. D=100,S=$1.20 k=0.05 D=115, S=$1.32 25 D=115, S=$1.116 25 D=90 S=$1.32 25 D=90 S=$1.116 25 4 A

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H7a-3. Use a decision tree to model Trip Logistics' option to not sign a lease and thus get all warehousing space from the spot market as needed with the following modifications: - The planning horizon is 2 years (not 3 as used in our book) - 1000sq. ft. of warehouse space needed for 1000 units of demand - Current demand =100,000 units per year - Binomial uncertainty: Demand (D) can go up by 15% with probability p=0.5 or down by 10% with 1p=0.5 - Lease price =$1.00 per sq. ft. per year - Spot market price (S)=$1.20 per sq. ft, per year Hint: the decision tree should look like this; then add the payoffs and compute the expected NPV of not - Spot prices can go up by 10% with p=0.5 or down by 7% signing the lease. with1p=0.5 - Revenue =$1.22 per unit of demand - k=0.05 (rate of return) What is the expected NPV of not signing the lease? What is the expected NPV if the rate of return k=0.10 ? That is, re-evaluate the decision tree with k=0.10