HOMEWORK 6, Agribusiness Project Management, AGBU 515, Spring 2017

All the problems must be neatly handwritten and stapled together. Sloppy homework assignments
will be penalized.

You MUST submit every homework assignment completed 100% to be eligible to take the
upcoming exam. All homework assignments MUST be done on your own. No collaboration is
allowed. You can talk to the instructor or the TA if you have questions. SHOW ALL WORK.

Due: 18:25 pm, August 7

Late homework: no credit will be given; however, you still must submit it
Submit to: Teaching assistant
Total points possible: 100

Problem 1 (15 points)

You have received offers from three companies. All offered prices are competitive and all proposals are
acceptable form technical point of view. You have investigated the history of those organizations and
find out that all three companies had problems with delivery in time.

Its very essential for you because you have to pay to your customer $1000 for each late delivery day.
The available information is presented in the Table below:

Company Delay probability, % Delay time, days

50 0
Company A 25 30
25 40
Company B 60 0
40 50
Company C 70 0
30 30

You have to decide which company is preferable based on decision tree and EMV calculation.

Problem 2 (15 points)

A company is deciding whether to develop and launch a new product.

Research and development costs are expected to be $400,000 and there is a 70% chance that the product
launch will be successful, and a 30% chance that it will fail.
If it is successful, the levels of expected profits and the probability of each occurring have been
estimated as follows, depending on whether the products popularity is high, medium or low:

Probability, % Profits
High: 20 $500,000 per annum for two years
Medium: 50 $400,000 per annum for two years
Low: 30 $300,000 per annum for two years
 If it is a failure, there is a 60% probability that the research and development work can be sold for
$50,000 and a 40% probability that it will be worth nothing at all.
Analyze the case and make your decision.

Problem 3 (30 points)

You have to make choice between two projects:

Raspberry Project for planting raspberries and exporting to Iran,
Strawberry Project for planting strawberries for local market.
The following data are available about the competing projects:

Expected Success
Project Investment Cost, $
Revenue, $ Probability, %
Raspberry Project 100 000 1 000 000 50
Strawberry Project 10 000 400 000 80

1. Define which project is preferable for investments.

After this please consider additional information.

Additional information related to the Raspberries Project:
A 1st grade certification will result in $1 000 000 sales (as originally expected). However, the
likelihood of obtaining the coveted commercial certification is only 30% due to the stringent
standard.
A less-stringent 2nd grade certification is 60% likely, but would result in only $800 000 sales.
There is a 10% chance that raspberries will not pass any certification test. In this case (a
complete failure) the company will lose the initial $100 000 investment cost.
Iranian state inspection charges a $5 000 non-refundable fee for the certification application.

2. Define which project is preferable for investments considering the additional information.
3. Make conclusions based on two cases
Problem 4 (40 points)

The owner of a chemical company is considering the launch of a new very efficient and safe fertilizer
with 10 years market demand forecast. He has to decide: to construct a big or small factory for this new
production.
Marketing department forecasted long-term high demand with probability 60% and long-term low
demand with probability 40%. The latter is distributed as following:

10% probability that initial high demand will change to low demand and 30% probability for
permanent low demand.
Marketing department provided also the following forecast data:
Big factory:
In case of high demand the profit will be $2 Mln yearly during 10 years;
In case of low demand the profit will be $0,2 Mln yearly due to big fixed expenses and
inefficient use of capacity;
Small factory:
In case the initial high demand the profit will be $0,9 Mln yearly but then the profit will drop
down to $0,5 Mln in case of continuing high demand due to market competition;
It will be rather efficient even in case of low demand and will give $0,8 Mln profit yearly;
In case of continuing high demand the small factory can be extended after 2 years and will
give $1,4 Mln profit yearly during next 8 years;
In case the small factory is extended, but high demand is changed to low demand, the profit
will be only $0,1 Mln yearly;
Also:
Construction of the big factory costs $6 Mln;
Construction of the small factory costs $2,6 Mln;
Expansion of the small factory costs $4,4 Mln.

Evaluate whether the company should construct a big or a small factory for its new
production. Show and explain every step in detail.