Dra Fast Ferment

__________________________________________ MSING014 MSING014B MSINM014 close & lay on the line summary 2011/2012 FINAL exam __________________________________________ The examination bequeath last for cardinal (2) hours. The exam is open book. You atomic bend 18 solelyowed to use the course pack, class hand turn bulge outs and any other materials that relate to the course. You are not get outed to access the internet, or e-mail. The examination paper consists of 10 questions You should answer ALL of the questions. Make intelligible any assumptions underlying your answers, interpret your esults and justify your answers, conclusions and recommendations. But keep your answers short and to the point. In grading, importance allow be attached to the clarity and conciseness of your answers. Good luck DECISION & RISK ANALYSIS EXAM FastFerment FastFerment is a start-up venture started by UCL scientists and engineers. The firm has disc everyplaceed an enzyme which accelerates the evolution of the mold Aspergillus Orgzae, which is used for qualification traditional strain-based alcoholic drinks (rice boozes) in East Asia such as Sake or Makgeolli.W hen this mill is included in the production of the rice boozes, the production lead time is shortened from 10 old age to 3 days without affecting the taste or quality of the wine, as it accelerates the fermentation of the rice. Thus, the pulverize screw substantially increase the production capacity for the rice-wine manu concomitanturing businesss and provide them with a competitive advantage. Recently, FastFerment has perfected the technology of genetically engineering and mass producing this accelerating enzyme and storing it in a powder form.They are presently formulating strategies to commercialize the powder by addressing the powder to manufacturers. Currently, they estimate in that location are 156 rice wine manufacturers, simply this could be as less as 140, as existing firms may no longer b e active, and as some(prenominal) an(prenominal) as 190, as there are recent new entrants to the market as the rice wines assume become popular in recent years. Because the powder is new, they hold back only a few advance(prenominal) adopters would be interested in the product. The y expect between 510% of the firms to be their effectiveness demoralizeers, with no specific percentage being great than the other.The set they would charge for 1 kg of the powder would depend on the damage of manufacturing the powder as well as the value it delivers to apiece manufacturer. later conducting initial market research, they expect an average manufacturer to be giveing to pay as luxuriously as ? 950/kg, only as low as ? 400/kg depending on the initial negotiations. They expect the selling price to be ? 550/kg. Moreover, it is uncertain how much step each manufacturer would want to buy, which will depend on their current production capacity, but they are estimating anywhere betw een 100kg to 400kg per firm.The founders agree that they would aim to hire professional sales people with the necessary k right offledge of the science of the powder to help them sell to each manufacturer. They do not know how many will join, but they have made an stick out to 6, and expect between 4 and 6 to join FastFerment, with each number being catchly likely. The yearly wage will be given in terms of salary (no commission), and it is expected to be ? 50,000, but it is negotiable between ? 45,000 and ? 75,000 depending on their qualifications and experience. FastFerment is similarly examining the court associated with production.While they have perfected the technology to manufacture the powder, they before long do not have the manufacturing plant set up to accommodate the effectiveness direct. Initial estimates rise that the fixed cost associated with setting up a manufacturing plant is at least ? 300,000 and at almost ? 600,000, with ? 500,000 being the most likely. The variant cost for producing 1kg of the powder is expected to be ? 200/kg, but this is also variable by 10% in either direction. Lowest Rice wine manufacturers 140 adopters (%) 5. 0% price/kg 400 Quantity of purchase (kg) 100 salesforce 4 Salary (? ) 45,000 Fixed cost of production (? 300,000 Variable cost per 1kg (? ) 180 TABLE 1 Likely 156 -550 50,000 500,000 200 MSING014 MSING014B MSINM014 superiorest 190 10. 0% 950 400 6 75,000 600,000 220 DECISION & RISK ANALYSIS EXAM The objective of FastFerment is to maximize the annual dough, but it is unclear whether the firm would be profitable based on the numbers. Question 1. Scenario summary Start seek for Excel and open the Excel spreadsheet FastFerment. Perform a scenario analysis for this venture, and determine the best-case and worst-case scenarios (do not use risk of infection for this, just plug the numbers in the model and observe the results).What are your conclusions? The scenario analysis below shows that there is signifi fuelt uncertainty in the profitability of this venture. The worst-case scenario shows a loss of ? 924,000, whereas the best-case scenario shows a strength profit of ? 5,372,000. So there is a substantial downside, but also a huge upside. AT this point, therefore, it is not recommended to thrust any decision, as it is further unclear how the risks will affect th profitability of this venture. Rice wine manufacturers early adopters (%) price/kg Quantity of purchase (kg) salesforce Salary (? ) Fixed cost of production (? )Variable cost per 1kg (? ) Annual profit (? ) Worst Case Scenario Best Case Scenario 140 190 5. 0% 10. 0% 400 950 100 400 6 4 75,000 45,000 600,000 300,000 220 180 -924,000 5,372,000 Question 2. Sensitivity Analysis Which is the biggest risk, (a) the variable cost/kg (b) the price/kg or (c) the % of early adopters? How did you determine this? A consume, do not yet use Risk. Setting as the base case 7. 5% for %-adopters, 250 to quantity of purchase, 5 as the number of salesforce, and the rest of the parameters to the most likely case, and we examine the emf daze of these three parameters.The price/kg is the biggest risk, with a potential impact of ? 1,608,750 when vary from 400 to 950 (-? 165,000 versus ? 1,443,750). The %-early adopters is the second biggest risk with a potential impact of ? 682,500 when varied from 5% to 10% (-? 67,500 versus ? 615,000). The variable cost/kg is the lowest risk with a potential impact of ? 117,000 when varied from 180 to 220 (? 215,250 versus ? 332,250). MSING014 MSING014B MSINM014 DECISION & RISK ANALYSIS EXAM Question 3. Simulation Analysis DistributionsTo coif a simulation analysis, we need to identify an appropriate distribution to model each of the risk factors. desexualize an appropriate distribution and their parameters for each of the risk factors. Triangular distributions (with the lowest, likely and highest estimates as parameters) would work well for all risks except % of early adop ters and quantity of purchase, which should be uniform (with the lowest and highest estimates as the parameters), and salesforce, which should be discrete with equal luck of 0. 33 to each three cases 4,5,6.Question 4. Simulation Analysis Average Using Risk, perform a simulation analysis, and determine the average profit for this venture. How high and low could the profit potentially be? comparison these results with the scenario analysis results. After performing 5000 iterations, the average profit is approximately ? 570,000. This means that if we were to run this business for many years, we would have an average annual profit of around ? 570,000 per year (provided the conditions do no change over time). MSING014 MSING014B MSINM014 DECISION & RISK ANALYSIS EXAMQuestion 5. Simulation Analysis VaR What is the likelihood that the profit is positive? What is the probability that the profit is ? 1. 5M or more? W hat is the Value-at-Risk (VaR)? There is about 80% chance of make a pr ofit, and about 10% chance of making a profit that is ? 1. 5M or more. The VaR at 5% is around -? 300,000. Question 6. Simulation Analysis Tornado Diagram Examine the tornado diagram. What can you conclude? Suppose that increasing the number of sales people and their salaries increase the quantity of powder that each manufacturer buys.Would this be a good investment? The tornado diagram shows that the quantity of purchase and the price/kg are the biggest risk factors. The risks related to the cost of production of the powder or the number of salesforce and salary are actually not that significant. Increasing the salesforce and the salary in return for increase in the quantity of purchase therefore seems to be a good investment. MSING014 MSING014B MSINM014 DECISION & RISK ANALYSIS EXAM quintuplet Grains is whizz of the leading manufacturers of rice wines.The chief executive officer of flipper Grains, a UCL alumnus, has learned about FastFerments powder through his personal net works, and immediately recognized the potential opportunity the powder can represent. According to quintette Grains recent internal consumer trend study, the demand for various speciality rice wines (using different variety of rice), which is currently negligible due to nonproduction, is expected to rise in the next several years. In particular, for the current year, they anticipate that with 50% the demand will be large (translating into a potential profit of ? 4. 5M), and with 50% it will be small (translating into a potential profit of ? . 5M). Although other firms are looking into producing the specialty rice wines, it is difficult for them to quickly do so as it requires building additional capacity, as most firms do not want to produce the specialty rice wines at the expense of sacrificing the traditional rice wine production. However, with access to the powder, firms can immediately free up their production capacity to mass produce the specialty rice-wines and capture its potential demand. atomic number 23 Grains also recognized that the competitors also eventually receive information and gain access to the FastFerments powder.If this happens, vanadium Grains will have to share the demand with its competitors. Based on intuition, the CEO believes that there is 70% chance that more than 1 competing manufacturers will eventually adopt the powder and engross into the specialty rice-wine market. In such case, Five Grains will only capture 20% of the demand and and then earn 20% of the potential profit. On the other hand, there is a 20% chance that one competitor adopts the powder, in which case they will be able to capture 50% of the demand and consequently earn 50% of the potential profit.He believes that there is only 10% chance that nobody else will MSING014 MSING014B MSINM014 DECISION & RISK ANALYSIS EXAM enter the market during the year, in which case they can capture 80% of the demand and 80% of the potential profit. To maximize their knowle dge of the powder, Five Grains is currently negotiating a skunk with FastFerment to look at for a 1-year exclusivity agreement. If the deal can be made, then Five Grains will be the only manufacturer with the access to the powder and be certain to capture 80% of demand (80% of profit). Question 7.Decision Analysis What to do? The meeting takes place and FastFerment asks Five Grains for ? 1. 5M for the 1-year exclusivity deal. Using a decision tree, find out whether or not Five Grains should agree to buy the 1-year exclusivity deal at ? 1. 5M. I would recommend Five Grains to not buy the one year exclusivity deal for ? 1. 5M, as the expected profit associated with not buying the deal (? 0. 8M) is greater than that with the deal (? 0. 5M). MSING014 MSING014B MSINM014 DECISION & RISK ANALYSIS EXAM Question 8. Decision Analysis Value?What is the maximum amount that Five Grains should pay for the 1-year exclusivity deal? The maximum amount that Five Grains should pay for the deal is ? 1. 2M, as it is the price when the expected profits are the same when buying and not buying. Question 9. Decision Analysis Risk/Sensitivity Examine the risk profile for Five Grains with and without the 1-year exclusivity deal at ? 1. 5M. If the demand turns out to be large, what is the (expected) profit with and without the 1 -year exclusivity deal? What if the demand turns out to be small?How does the value of 1-year exclusivity deal change with respect to the probability that the demand is large? If the demand turns out to be large, then with the 1-year exclusivity deal, Five Grains will earn ? 2. 1M, whereas without it they will earn ? 1. 44M on average with the risk of earning less than ? 1M. However, if the demand turns out to be small, then Five Grains will lose ? 1. 1M, whereas without it they will earn ? 0. 16M. Thus, while there is high upside with the 1-year exclusivity deal, it also represents a greater downside risk. MSING014 MSING014B MSINM014 DECISION & RISK A NALYSIS EXAMWhen the probability that the demand is high increases by 1%, there is a ? 12,800 increase in the expected profit. MSING014 MSING014B MSINM014 DECISION & RISK ANALYSIS EXAM Question 10. Decision Analysis A year later The deal for the 1-year exclusivity had been signed for ? 1M, and the demand for the specialty rice wines had turned out to be high. After a new study, Five Grains now projects that the demand for the variety wine will be large with probability 90% (translating into a potential profit of ? 9M), and small with probability 10% (translating into a profit of ? 1M).Moreover, the CEO feels that there is a 95% chance that more than one competitor will adopt the powder, which would allow them to earn 20% of the potential profit, and there is a 5% chance that only 1 firm will adopt , which would allow them to earn 50% of the potential profit. He believes that there is 0% that no firm adopts the powder this year, unless Five Grain brokers a 1-year exclusivity deal again with FastFerment, in which case they will earn 80% of the potential profit. (i) W hat is the value of 1-year exclusivity for this year for Five Grains? Call this VFG. Five Grains contacts FastFerment and offers to pay (0. * VFG) for a 1-year exclusivity deal, citing the fact that it represents a steep increase from the ? 1M paid in the previous year. (ii) From FastFerments point of view, they believe that the acceptation rate of the powder has now increased and expects between 5060% of the manufacturers to become their potential buyers. victorious the rest of the parameters from the previous year as a conservative estimate of the current year (change all the parameters in Table 1, except the % -adopters), what is the minimum amount that FastFerment should demand from Five Grains this year for the 1-year exclusivity deal? pasture the simulation analysis using Risk and find the expected profit with the high adoption rate. W ill the deal go through? From the Decision Tree, we f ind that the value is approximately ? 4. 8M. MSING014 MSING014B MSINM014 DECISION & RISK ANALYSIS EXAM We find that with the adoption rate between 5060%, the expected profit is around ? 8. 9M, and there is 10% chance that FastFerment will make ? 15M or more. The deal wont go through this time as the 1-year exclusivity deal would need to be prohibitively expensive for Five Grains. MSING014 MSING014B MSINM014