Precision Tree Exercise – Marsh’s Metals Precision Tree Exercise – The Purchase Read the following case study about Marsh’s Metals and construct a Precision Tree (using the Palisades Precision Tree software) that graphically reflects the constraints and opportunities of the problem. Create a 4 to 7 pages mini report that explains what you did, what you found out, and the full Precision Tree and the optimal Precision Tree for this problem.
The Case Study
Marsh’s Metals, a privately held metals broker in Prescott Florida, has acquired an option to purchase 10,000 kilograms of partially refined rhenium ore (Re) from the Niger government for $8,000 per kilogram1. Rhenium is a rare earth ore that can be processed into several different high strength
steel products used in fabrication manufacturing (think cutting and carving and airplane parts in engines). Bob Marsh is a graduate of the Prescott School of Mines and Metallurgy (PSMM – Go miners, go dig it!) and the owner of Marsh’s Metals, estimates that he would be able to sell the ore for
$12,000 per kilogram after importing it to the USA.
However, the U.S. government is currently negotiating with Niger over alleged “dumping” of certain manufactured goods which the country exports to the United States. As part of these negotiations, the U.S. government has threatened to ban the import from Niger of a class of materials and ores that includes rhenium.
If the U.S. government refuses to issue an import license for the rhenium after Marsh has purchased it, then Marsh will have to pay a penalty of $1,000 per kilogram to the Niger government to cancel the purchase of the rhenium.
Marsh has used your services in the past. You are a well-known decision analyst from Prescott Florida, and Bob Marsh again calls you to help him with this decision. From prior analyses you know that Bob Marsh’s is well-versed in decision analysis terminology, and he is able to use decision analysis terms in his discussion with you.
You: “As I understand it, you can buy the 10,000 kilograms of rhenium ore for $8,000 a kilogram and sell it for $12,000, which gives a profit of ($12,000 – $8.000) X 10,000 = $40,000,000. However, there is some chance that you cannot obtain an import license, in which case you will have to pay $1,000 per kilogram to cancel the purchase contract. In 1 1 kilogram= approximately 2 pounds 3 ounces.
that case you will lose $1,000 X 10,000 = $1,000,000 due to the cost of canceling the contract.”
Marsh: “Actually, ‘some chance’ may be an understatement here. The internal politics of Niger make it hard for their government to agree to stop selling their manufactured goods at very low prices here in the United States. Poverty is so high in that country so any sales really do help the average citizens. My chances are only sixty percent that I will be able to obtain the import license. As you know, Marsh’s Metals is not a very large company. The $1,000,000 loss would be serious, although certainly not fatal to the company. On the other hand, making $40,000,000 would certainly help the company balance sheet.”
Question for this problem:
Which alternative should Marsh’s select? Assume that Marsh’s uses the expected monetary value as his decision criterion.
To answer this question, construct a Precision tree. There are two possible alternatives, purchase the rhenium or don’t purchase it. If the rhenium is purchased, then there is uncertainty about whether the import license will be issued or not. These uncertainties then create either the opportunity for profit or for loss that must be included in the Precision Tree. Remember, income is positive and expenses are negatives.
Composition of your Mini Report – Be sure that each of these points is covered in your mini report
Your mini report should be between 4 and 6 pages long with New Times Roman, font 12 point with ¾ inch margins (but it can be longer as you so desire) covering the following:
1. A summary of what the case study is about, what you did to solve the problem, and what the results of the Precision Tree and the decision and sensitivity analyses – limited to 200 words.
2. The body of the report explain what you did, how you did it, and what you found out. Be sure to copy the complete Precision Tree and the optional Precision Tree into the Word document by using the PrntScr button on your keyboard2. Then paste the picture into the document, and crop out all non-necessary stuff in the picture.
3. Discuss the complete Precision Tree, the various branches, and what they mean to this problem. Again be specific in reviewing these results.
4. What are the estimates of the expected monetary value as created in Precision Tree? What is the direction that they suggest, and is this a reasonable suggestion? Be specific in this answer.
5. What is your recommendation to company on how they can minimize their possible loss and increase the possible profit? Be specific!!!!
2 This copies the picture so that you can right click on your mouse and paste it into the Word document.
6. A concluding statement summarizing the problem and the solution – limited to 75 words.
7. A citation of the case study and any additional research (which is encouraged) that you did.
8. Attach your Excel file with the Precision Tree as part of it to the report or as part of your attachment in Blackboard.
So that is your challenge, to keep your job you need to be accurate, so let’s be accurate in this case study calculations and report. Remember neatness counts so let’s make the report look professional.
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