The manager of the company ABC (requiring warehouse) has two alternatives: i) rent from a spot...

 

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The manager of the company ABC (requiring warehouse) has two alternatives: i) rent from a spot market, ii) leasing company, for the three-year period planning horizon. It is forecasted that ABC will handle a demand of 20,000 items while each item needs 1 sq ft. The three-year lease costs $1,5 and the spot market rate is $2 per sq. ft per year. From one year to the next, demand may go up by 50 percent with a probability of 0.7 or go down by 20 percent with a probability of 0.3. Similarly, from one year to the next, spot prices for warehouse space may go up by 25 percent with probability 0.5 or go down by 50 percent with probability 0.5.The spot prices and demand fluctuate independently. The leasing contract is not flexible and provides 30.000 sq. ft space, if it is signed. ABC sells each product $ 3. Which alternative is more profitable? (Draw decision tree, use multiplicative binomial representation, discount factor = %10) (40 points) The manager of the company ABC (requiring warehouse) has two alternatives: i) rent from a spot market, ii) leasing company, for the three-year period planning horizon. It is forecasted that ABC will handle a demand of 20,000 items while each item needs 1 sq ft. The three-year lease costs $1,5 and the spot market rate is $2 per sq. ft per year. From one year to the next, demand may go up by 50 percent with a probability of 0.7 or go down by 20 percent with a probability of 0.3. Similarly, from one year to the next, spot prices for warehouse space may go up by 25 percent with probability 0.5 or go down by 50 percent with probability 0.5.The spot prices and demand fluctuate independently. The leasing contract is not flexible and provides 30.000 sq. ft space, if it is signed. ABC sells each product $ 3. Which alternative is more profitable? (Draw decision tree, use multiplicative binomial representation, discount factor = %10) (40 points)