Unipart, a manufacturer of auto parts, is considering two B2B marketplaces to pu
ID: 2736722 • Letter: U
Question
Unipart, a manufacturer of auto parts, is considering two B2B marketplaces to purchase its MRO 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? Please show me how you got the anser in excel.
Explanation / Answer
It is given that Year 1 costs are incurred now and Year 2 costs are incurred in a year
First let’s draw a decision tree for the possible spending of the company –
time
t=0
t=1
Probability
cash flows
Probability
cash flows
0.5
150
0.75
150
0.5
135
Unipart
0.5
135
0.25
135
0.5
121.5
Now calculate the NPV of the commission for both the suppliers
The commission for Parts4U.com in different scenario –
NPV = C0 + C1/(1+r)
Where C0 and C1 are the cash flows for period 1 and 2 respectively and r is the discount rate = 20%
C0 + C1/(1+r) = NPV
Probability
NPV*Probability
150, 150
150*0.05 + (150*0.05)/1.2 = 13.75
0.375 (=.75*.5)
5.15
150, 135
150*0.05 + (135*0.05)/1.2 = 13.125
0.375 (=.75*.5)
4.92
135, 135
135*0.05 + (135*0.05)/1.2 = 12.375
0.125 (=.25*.5)
1.55
135, 121.5
135*0.05 + (121.5*0.05)/1.2 = 11.8125
0.125 (=.25*.5)
1.48
NPV for Parts4U
13.10 million
The commission for For AllMRO.com in different scenario –
C0 + C1/(1+r) = NPV
Probability
NPV*Probability
150, 150
10 + 150*0.01 + (150*0.01)/1.2 = 12.75
0.375 (=.75*.5)
4.78
150, 135
10 + 150*0.01 + (135*0.01)/1.2 = 12.625
0.375 (=.75*.5)
4.73
135, 135
10 + 135*0.01 + (135*0.01)/1.2 = 12.475
0.125 (=.25*.5)
1.56
135, 121.5
10 + 135*0.01 + (121.5*0.01)/1.2 = 12.3625
0.125 (=.25*.5)
1.55
NPV for AllMRO
12.62 million
Here the NPV of the commission is lower for AllMRO.com than Parts4U.com. Therefore Unipart should buy its parts from AllMRO.com
time
t=0
t=1
Probability
cash flows
Probability
cash flows
0.5
150
0.75
150
0.5
135
Unipart
0.5
135
0.25
135
0.5
121.5
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