Perform a sensitivity analysis on the selling price

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Reference no: EM13876952

In Precision Tree/Palisade in Excel format, show decision tree and calculations for the Business Fellow problem.

DRAW A DECISION TREE and Calculate

Business Fellow needed to import some Pullovers from a different nation UNKNOWN in the Southern Hemisphere. BusinessFellow stands to profit from their low wages if only the business deal goes through. BusinessFellow may end up paying a flat rate of £9 for each Pullover and while possibly turning around to sell them for £22 each on wholesale platform to other vendors in the same nation country. The trick is, BusinessFellow will require a permit to import. On the other hand UNKNOWN as a nation does not have labor laws in the books that regulate age ranges or age requirement in the labor market; therefore, the probability of securing the permit to import is half and half. The minimum order is 200,000 Pullovers varying in sizes and BusinessFellow knows that he can very easily sell the Pullovers. Should the permit to import not be granted, BusinessFellow will be forced to pay £3 per Pullover to the manufacturer so as to nullify the current agreement.

a. Using Expected Value (EV), should Business Fellow buy or not buy the Pullovers?
b. Every calculation should be with the minimum order.

BusinessFellow might also file for the permit to import and wait before placing his orders for the Pullovers, but the permit process will come with a cost of £499 in filing and processing fees to BusinessFellow. It is also apparent that there is a catch to this whole thing. There are some competitors in the same line of business that might jump and take advantage of the £12 profit per Pullover (£22 - £9) and there is a 69% probability that another person would take this deal making BusinessFellow a loser on the deal.

a. Should BusinessFellow apply for the permit and then patiently wait or should he go on with the deal?

If BusinessFellow decides, he might retain some consultants who have business relationships with the ministry that issues the permit, and these consultants could get additional information on securing the permit quicker. Amongst the consultants is ExpertConsultant who collects a fee for this service.

ExpertConsultant's track record shows a 89% success in saying what permit filing is going to be accepted and generally also result in permit issued. While on the other hand, when he predicts a permit will not be issued, he is right up to 59% of the time. ExpertConsultant collects £6300 for his service.

a. Do you think the extra information from Expert Consultant is worth his service fee?
b. What should Business Fellow do?

BusinessFellow realized that the £9 purchase price and the £3 fee for the agreement nullification are nonnegotiable, nevertheless BusinessFellow has doubts that the Pullovers can sell at £22 each.

a. BusinessFellow prefers to perform a sensitivity analysis on the selling price from £12 to £25 to gain understanding of the expected value.

Reference no: EM13876952

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