Question

HI I NEED TO DO A DECISION TREE OF THIS, PLEASE HELP!

Unipart, a manufacturer of auto parts, is considering two B2B (Business-to-Business) marketplaces to purchase its MRO (Maintenance, Repair, and Operating) supplies. Both marketplaces offer a full line of supplies at very similar prices for products and shipping. Both provide similar service levels and lead times. However, their fee structures are quite different. The first marketplace, Parts4u.com, sells all of its products with a 5 percent commission tacked on top of the price of the product (not including shipping). AllMRO.com's pricing is based on a subscription fee of $10 million that must be paid up front for a two-year period and a commission of 1 percent on each transaction's product price. Unipart spends about $150 million on MRO supplies each year, although this varies with their utilization. Next year will likely be a strong year, in which high utilization will keep MRO spending at $150 million. However, there is a 25 percent chance that spending will drop by 10 percent. The second year, there is a 50 percent chance that the spending level will stay where it was in the first year and a 50 percent chance that it will drop by another 10 percent. Unipart uses a discount rate of 20 percent. Assume all costs are incurred at the beginning of each year (so Year 1 costs are incurred now, and Year 2 costs are incurred in a year). From which B2B marketplace should Unipart buy its parts? (Hint: calculate the NPV cost incurred)

Answer 1

Answer :

	Parts4u.com	AllMRO.com's
prices	same	same
service levels	same	same
lead times	same	same
fee structures	5 percent commission	1 percent commission
subscription fee	Nil	$10 million
Unipart spends about $150 million on MRO
first year $150*10% = 15
so first year expected to spend 135 million
second year another 10% drop = 150*10+10 = 30
so second year expected to spend 120 million
And Unipart uses a discount rate of 20 percent

By keeping all this Unipart is spending 120 to 150 million per year. So here we compare this two B2B by taking concept of Time value of money. The time value of money concept says that “The value of Dollar today is more worthy then tomorrow” so by observing AllMRO.com's is taking subscription fee of $10 million as Parts4u.com not taking any subscription fee so as per my view we have to select Parts4u.com.