Operations and Supply Chain Management The Core

STRATEGIC CAPACITY MANAGEMENT chapter 4 103
Decision Tree for Hackers Computer Store Problem exhibit 4.3
Move
Strong growth
0.55
Revenue-Move_Cost
Weak growth
0.45
Revenue-Move_Cost
Hackers Computer
Store
Expand
Strong growth
0.55
Weak growth
0.45
Revenue-Expansion_Cost
Revenue-Expansion_Cost
Strong growth
Expand
Revenue-Expansion_Cost
Do nothing
0.55
Do nothing
Revenue
Weak growth
0.45
Revenue
Decision Tree Analysis exhibit 4.4
Hackers Computer
Store
Strong growth
0.550
Move
$585,000
Weak growth
0.450
Strong growth
Expand
0.550
$660,500
Do nothing; $703,750 Weak growth
0.450
Strong growth
0.550
Do nothing
$703,750
Weak growth
0.450
Revenue-Move_Cost = $765,000
Revenue-Move_Cost = $365,000
Revenue-Expansion_Cost = $863,000
Revenue-Expansion_Cost = $413,000
Expand
Revenue-Expansion_Cost = $843,000
Do nothing; $850,000
Do nothing
Revenue = $850,000
Revenue = $525,000
$428,487 (195,000 × 3.274293654) minus the $210,000 cost to move immediately. Exhibit 4.5
shows the analysis considering the discounted flows. Details of the calculations are given below.
The present value table in Appendix C can be used to look up the discount factors. In order to
make our calculations agree with those completed by Excel [in Excel, calculate the discount factor
= (1 + interest rate) (− years) ], we have used discount factors that are calculated to 10 digits of
precision. The only calculation that is a little tricky is the one for revenue when we do nothing now
and expand at the beginning of next year. In this case, we have a revenue stream of $170,000 the first
year, followed by four years at $190,000. The first part of the calculation (170,000 × 0.862068966)