Reference no: EM132014298

Trips Logistics, a third-party logistics firm that provides warehousing and other logistics services, is facing a decision regarding the amount of space to lease for the upcoming threeyear period. The general manager has forecast that Trips Logistics will need to handle a demand of 100,000 units for each of the next three years. Historically, Trips Logistics has required 1,000 square feet of warehouse space for every 1,000 units of demand. For the purposes of this discussion, the only cost Trips Logistics faces is the cost for the warehouse. The manager forecasts that from one year to the next, demand may go up by 20 percent, with a probability of 0.5, or go down by 20 percent, with a probability of 0.5. The probabilities of the two outcomes are independent and unchanged from one year to the next. He also forecast that from one year to the next, spot prices for warehouse space may go up by 10 percent, with probability 0.5, or go down by 10 percent, with probability 0.5. The probabilities of the two outcomes are independent and unchanged from one year to the next. The general manager believes that prices of warehouse space and demand for the product fluctuate independently. Each unit Trips Logistics handles results in revenue of $1.22, and Trips Logistics is committed to handling all demand that arises. Trips Logistics uses a discount rate of k = 0.1 for each of the three years. The general manager must decide whether 1. to sign a three-year lease with the cost of $1 per square foot per year up to 100,000 square feet and for additional space Trips Logistics should obtain warehouse space on the spot market with the price $?? per square foot per year. 2. to obtain warehousing space on the spot market for three years without no limitation on space, and the spot market rate is expected to be $?? per square foot per year for each of the three years. 3. to accept a contract, Flexible Lease, in which, for an upfront payment of $10,000, Trips Logistics will have the flexibility of using between 60,000 square feet and 100,000 square feet of warehouse space at $1 per square foot per year. For additional space Trips Logistics should obtain warehouse space on the spot market with the price $?? per square foot per year. The Net Present Value (NPV) of the two first option has been analyzed in the class. For the Flexible Lease find the NPV and conclude which option is better to pick. Trips Logistics has a discount rate of k = 0.1.