Chapter

11

Location

DISCUSSION QUESTIONS 1. Answers depend on the specific organizations and industries selected by the teams. Some expected tendencies for manufacturers are: Textiles, furniture, consumer electronics Paper, plastic pipe, cars, heavy metals, and food processing Quality of life High technology and research firms Proximity to suppliers and Paper mills, food processors, and cement manufacturers resources Proximity to companys Feeder plants and certain product lines in computer other facilities manufacturing industry For service providers, the usually dominant location factor is proximity to customers, which is related to revenues. Other factors that also can be crucial are transportation costs and proximity to markets (such as for distribution centers and warehouses), location of competitors, and site-specific factors such as retail activity and residential density for retailers. Data collection relates to the factors selected, which can be collected with onsite visits or from consultants, chambers of commerce, governmental agencies, banks, and the like. For locations in other countries, additional information is needed about differences in political differences, labor laws, tax laws, regulatory requirements, and cultural differences. It is also important to assess how much control the home office should retain, and the extent to which new techniques will be accepted. 2. The rust belt city has made long-term investments in the stadium, roads, zoning, and planning to the benefit of the baseball team (an entertainment service). Leaving the rust belt city leaves the city with these long-term obligations with no means to pay for them. For example, when General Motors closed a large facility in a small community, the results were so devastating that the community sued GM for damages. Retailers in the vicinity have built facilities and operate stores that may not be viable any longer if the team moves. Baseball fans also may not be too sympathetic with the baseball owner. Favorable labor climate Proximity to markets

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PROBLEMS 1. Preference matrix location for A, B, C, or D

Location Factor 1. Labor climate 2. Quality of life 3. Transportation system 4. Proximity to markets 5. Proximity to materials 6. Taxes 7. Utilities Total Factor Weight 5 30 5 25 5 15 15 100 A 5 2 3 5 3 2 5 25 60 15 125 15 30 75 345 Factor Score for Each Location B C 4 20 3 15 3 90 5 150 4 20 3 15 3 75 4 100 2 10 3 15 5 75 5 75 4 60 2 30 350 400 D 5 1 5 4 5 4 1 25 30 25 100 25 60 15 280

Location C, with 400 points. 2. John and Jane Darling

Location Factor 1. Rent 2. Quality of life 3. Schools 4. Proximity to work 5. Proximity to recreation 6. Neighborhood security 7. Utilities Total Factor Weight 25 20 5 10 15 15 10 100 A 3 2 3 5 4 2 4 Factor Score for Each Location B C 75 1 25 2 50 40 5 100 5 100 15 5 25 3 15 50 3 30 4 40 60 4 60 5 75 30 4 60 4 60 40 2 20 3 30 310 320 370 D 5 4 1 3 2 4 5 125 80 5 30 30 60 50 380

Location D, the in-laws downstairs apartment, is indicated by the highest score. This points out a criticism of the technique: the Darlings did not include or give weight to a relevant factor. 3. Jackson or Dayton locations Jackson $250(30,000) [$1,500,000 + ($50 30,000)] = $7,500,000 $3,000,000 = $4,500,000 Dayton $250(40,000) [$2,800,000 + ($85 40,000)] = $10,000,000 $6,200,000
= $3,800,000 Jackson yields higher total profit contribution per year.

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4. Fall-Line, Inc. a. Plot of total costs (in $ millions) versus volume (in thousands)
18 16 Aspen 14 12 10 8 Wounded Knee 6 4 2 0 0 10 20 30 40 Medicine Lodge Broken Bow 50 60 70 80 Volume Wounded Knee Medicine Lodge Broken Bow

b. Medicine Lodge is the lowest-cost location for volumes up to 25,000 pairs per year. Broken Bow is the best choice over the range of 25,000 to 44,000 pairs per year. Wounded Knee is the lowest-cost location for volumes over 44,000 pairs per year. Aspen is not the low-cost location at any volume. c. Aspen $500(60,000) [$8,000,000 + ($250 60,000)] = $30,000,000 $23,000,000 = $7,000,000 Medicine Lodge $350(45,000) [$2,400,000 + ($130 45,000)] = $15,750,000 $8,250,000 = $7,500,000 Broken Bow $350(43,000) [$3,400,000 + ($90 43,000)] = $15,050,000 $7,270,000 = $7,780,000 Wounded Knee $350(40,000) [$4,500,000 + ($65 40,000)] = $14,000,000 $7,100,000
= $6,900,000

d. Aspen would surpass Broken Bow when the Aspen profit is $7,780,000. $500Q ($8,000,000 + ($250Q)} = $7,780,000 $250Q = 15,780,000
Q = 63,120 Aspen would be the best location if sales would exceed 63,120 pairs per year.

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5.

Wiebe Trucking, Inc. a. Plot of total costs (in $ millions) versus volume (in thousands)
9

5,000,000 + 4.65 Q Denver

7

4,200,000 + 6.25 Q 4 Santa Fe

3 0

3,500,000 + 7.25 Q Salt Lake City

200

400 Volume

600

800

576.9

b. For up to 576,923 shipments per year, Salt Lake City is the best location. Beyond that, Denver is the best location. 6. Sams Bagels Expected annual profits from Downtown location: 30,000(3.25 1.50) 12,000 = $40,500 Expected annual profits from Suburban location: 25,000(2.85 1.00) 8,000 = $38,250 Recommend Downtown location. 7. Distance between three points Point A = (20, 20) Point B = (50, 10) Point C = (50, 60) a. Euclidean distance

d AB = ( x A x B ) 2 + ( y A y B ) 2
dBC = (50 50 )2 + (10 60 )2 = ( 0 + 2500 ) = 50

dAB = (20 50)2 + (20 10 )2 = (900 + 100 ) . = 3162 ( 20 50 )2 + ( 20 60 )2 = = (900 + 1600 ) = 50.0

dAC

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b. Rectilinear distances dAB = x A xB + yA yB dAB = 30 + 10 = 40 dBC = 0 + 50 = 50 dAC = 30 + 40 = 70

8. Centura High School

Inputs
Solver - Center of Gravity Enter data in yellow shaded areas. Enter the names of the towns and the coordinates (x and y) and population (or load, l) of each town.

City/Town Name Boelus Cairo Dannebrog

x 106.72 106.68 106.77

y 46.31 46.37 46.34

l 228 737 356

1321 Center-of-Gravity Coordinates x* y*

lx 24332.16 78623.16 38010.12 0 0 140965.4 106.71 46.35

ly 10558.68 34174.69 16497.04 0 0 61230.41

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9. The address shown on the map below seems to be a reasonable choice 548 Main Avenue, Fargo ND

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10.

Inputs
Solver - Center of Gravity Enter data in yellow shaded areas. Enter the names of the towns and the coordinates (x and y) and population (or load, l) of each town.

City/Town Name Standard Products National Products Golf Cart, Inc. ACME Corp. Speedy Electronics

x 40.15 40.21 7 40.14 8 40.18 2 40.19 3

y 122.264 122.28 122.236 122.21 122.196

l 4000 3000 7000 2000 1000 17000

lx 160600 120651 281036 80364 40193 682844

ly 489056 366840 855652 244420 122196 2078164

Center-of-Gravity Coordinates

x* y*

40.17 122.24

latitude longitud e

11. Vals Pizza Treating the southwest corner of the plot as the origin and estimating the coordinates, Point A location (1.00, 1.75), demand = 4000 Point B location (3.75, 2.00), demand = 1000 Point C location (4.75, 2.50), demand = 1000 Point D location (5.00, 0.00), demand = 1000 Point E location (0.75, 0.50), demand = 500 a. x * =

li xi
i

li
i

and y* =

li yi li
i i

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x* = x* =

( 4000 1.00 ) + (1000 3.75) + (1000 4.75) + (1000 5.00 ) + (500 0.75) ( 4000 + 1000 + 1000 + 1000 + 500 )

17,875 = 2.38 7500 ( 4000 1.75) + (1000 2.00 ) + (1000 2.50 ) + (1000 0.00 ) + (500 0.50 ) y* = ( 4000 + 1000 + 1000 + 1000 + 500 ) 11750 = 1.57 y* = 7500

Vals should start looking for locations at about 30th and O streets, say at (2.5, 1.5). b. Rectilinear load-distance score. Assuming Vals location at (2.5, 1.5).
Location Point A Point B Point C Point D Point E Load 4000 1000 1000 1000 500 Distance 1.75 1.75 3.25 4.00 2.75 ld score 7000 1750 3250 4000 1375 17,375

c. Rectilinear distance from Vals (at 2.5, 1.5) to the farthest point D (5.0, 0.0) is 4 miles. At two minutes per mile, the travel time is eight minutes. 12. Davis, California, Post Office a. Center of Gravity li xi li yi x* = i and y* = i li li
i i

(6 2) + (3 6) + (3 8) + (3 13) + (2 15) + (7 6) + (5 18) + (3 10) (6 + 3 + 3 + 3 + 2 + 7 + 5 + 3) 285 = 8.9 x* = 32 (6 8) + (3 1) + (3 5) + (3 3) + (2 10) + (7 14) + (5 1) + (3 3) y* = (6 + 3 + 3 + 3 + 2 + 7 + 5 + 3) 207 = 65 y* = . 32 x* =

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b. Load distance scores

Mail Source Point 1 2 3 4 5 6 7 M Round Trips per Day (l) 6 3 3 3 2 7 5 3 xyCoord (2, 8) (6, 1) (8, 5) (13, 3) (15, 10) (6, 14) (18, 1) (10, 3) Load-distance to M: (10, 3) 6(8 + 5) = 78 3(4 + 2) = 18 3(2 + 2) = 12 3(3 + 0) = 9 2(5 + 7) = 24 7(4 + 11) = 105 5(8 + 2) = 50 3(0 + 0) = 0 Total = 296 Load-distance to CG: (8.9, 6.5) 6(6.9 + 1.5) = 50.4 3(2.9 + 5.5) = 25.2 3(0.9 + 1.5) = 7.2 3(4.1 + 3.5) = 22.8 2(6.1 + 3.5) = 19.2 7(2.9 + 7.5) = 72.8 5(9.1 + 5.5) = 73.0 3(1.1 + 3.5) = 13.8 Total = 284.4

13. Paramount a. Euclidean distance

d AB = ( x A x B ) 2 + ( y A y B ) 2

dAB = (100 400 )2 + (200 100 )2 dAB = (90,000 + 10,000 ) = 316.2

dBC = ( 400 100)2 + (100 100 )2 dBC = (90,000) = 300

dAC = (100 100 )2 + (200 100 )2 dAC = (10,000 ) = 100

Location A A 4000($3)(0) B 3000($1)(316.2) C 4000($3)(100) Location B A 4000($3)(316.2) B 3000($1)(0) C 4000($3)(300) Location C A 4000($3)(100) B 3000($1)(300) C 4000($3)(0)

= = =

$0 $ 948,600 $1,200,000 $2,148,600 $3,794,400 $0 $3,600,000 $7,394,400 $1,200,000 $ 900,000 $0 $2,100,000 lowest transportation cost

= = =

= = =

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b. Rectilinear distances dAB = x A xB + yA yB

dAB = 100 400 + 200 100 dAB = 400 dBC = 400 100 + 100 100 dBC = 300 dAC = 100 100 + 200 100 dAC = 100

Location A A 4000($3)(0) B 3000($1)(400) C 4000($3)(100) Location B A 4000($3)(400) B 3000($1)(0) C 4000($3)(300) Location C A 4000($3)(100) B 3000($1)(300) C 4000($3)(0)

= = =

$0 $1,200,000 $1,200,000 $2,400,000 $4,800,000 $0 $3,600,000 $8,400,000 $1,200,000 $ 900,000 $0 $2,100,000 Location C is again indicated

= = =

= = =

c. Center of gravity (133.33, 144.44) li xi li yi * * i x = and y = i li li

i i

(100 $12,000) + (400 $3,000) + (100 $12,000) ( 27,000 ) 3,600,000 x* = = 133.33 27,000 (200 $12,000) + (100 $3,000) + (100 $12,000) y* = ( 27,000 ) 3,900,000 y* = = 144.44 27,000 x* =

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14. Personal computer manufacturer From port at Los Angeles: To Chicago: $0.0017/mile 1,800 miles To Atlanta: $0.0017/mile 2,600 miles To New York: $0.0017/mile 3,200 miles From port at San Francisco: To Chicago: $0.0020/mile 1,700 miles To Atlanta: $0.0020/mile 2,800 miles To New York: $0.0020/mile 3,000 miles

= = = = = =

$3.06/unit $4.42/unit $5.44/unit $3.40/unit $5.60/unit $6.00/unit

Now we use the load-distance method to evaluate each port, where ld = i lidi Cost of port at Los Angeles: $3.06(10,000) + $4.42(7,500) + $5.44(12,500) = $131,750 Cost of port at San Francisco: $3.40(10,000) + $5.60(7,500) + $6.00(12,500) = $151,000 Therefore, the more cost-effective city is Los Angeles. 15. Optimal shipping pattern is:
Source El Paso New York City Demand Destination Atlanta $4 8,000 $3 8,000 8,000 2,000 10,000 4,000 $7 Omaha $5 4,000 $9 10,000 22,000 Seattle $6 12,000 Capacity

Ship 8000 cases from El Paso to Omaha @ $5: $40,000 Ship 4000 cases from El Paso to Seattle @ $6: $24,000 Ship 8000 cases from New York City to Atlanta @ $3: $24,000 Ship 2000 cases from New York City to Omaha @ $7: $14,000 Minimum transportation costs $102,000 This solution can be obtained with Tutor 11.4 of OM Explorer, using a dummy as the fourth destination with no demand, and a dummy for the third source with a capacity of 0. Just unprotect the worksheet to put in the names of the cities, and hide the columns and rows of the dummies. The results follow:

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Tutor - Transportation Method

Enter data in yellow shaded areas.

Wholesaler El Paso

Atlanta

Distribution Center Omaha

4 3 5

Seattle
6

Capacity
12,000 10,000

8,000
7

4,000
9

New York City Requirements Costs Total Cost

8,000
8,000 $24,000

2,000
10,000 $54,000 4,000 $24,000

22,000 22,000

$102,000

16. Placing a warehouse at 2568 Sunset Blvd., West Columbia, SC 29169 will result in a load distance score of 77,043 miles.

17. Pelican Company a. The sum of requirements equals the sum of demands, so no dummy plant or warehouse is needed. The capacity is fully utilized and the demand is fully satisfied. The following shows an optimal solution found with Tutor 11.4, where the quantities are in thousands of gallons.
Tutor - Transportation Method
Enter data in yellow shaded areas.

Wholesaler 1

A
1.3 1.3

Distribution Center B C
1.4 1.8 1.8

D
1.6

Capacity
50 1.6 70 1.5

50
1.5

2 3 Requirements Costs Total Cost

40
1.6

10
1.4

20
1.7

10
40 $52 60 $85 30 $53

50
50 $75

60

180 180

$265

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b. Total cost of the preceding solution (in $000) is (50 1.4) + (40 1.3) + (30 1.8) + (10 1.4) + (50 1.5) = $265 18. Acme Company The optimal solution follows. The total transportation costs are: [(60,000 $1) + (20,000 $3) + (50,000 $1) + (10,000 $4) + (20,000 $3) +

(40,000 $1) + (50,000 $2)] = $410,000

Shipping Cost ($/case) to Warehouse W1 $1 60,000 $2 $1 $5 W2 $3 20,000 $2 $5 $2 50,000 60,000 70,000 50,000 30,000 40,000 $1 50,000 $1 $4 $4 10,000 $3 20,000 $5 $5 60,000 $1 40,000 $4 50,000 250,000 60,000 W3 $4 W4 $5 W5 $6 80,000

Factory F1 F2 F3 F4 Demand

Capacity

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These results can be obtained from OM Explorer, this time using the Transportation Method solver (with the larger problem size, Tutor 10.4 cannot be used):
Solver Transportation Method
Destinations
W1 W2 W3 W4 W5

Capacity 80,000 60,000 60,000 50,000 250,000

Sources
F1 F2 F3 F4 Reqt's

1 2 1 5 60,000

3 2 5 2 70,000

4 1 1 4 50,000

5 4 3 5 30,000

6 5 1 4 40,000

Destinations
W1 W2 W3 W4 W5

Capacity 80,000 60,000 60,000 50,000 250,000

Sources F1 F2 F3 F4 Reqt's Totals

60,000 0 0 0 60,000

10,000 10,000 0 50,000 70,000

0 50,000 0 0 50,000

10,000 0 20,000 0 30,000

0 0 40,000 0 40,000

$60,000 $150,000 $50,000 $110,000 $40,000 $410,000

19. Giant Farmer Company Buffalo location-optimal solution:

Plant Chicago Houston Buffalo Requirements Distribution Center Denver Lincoln 2 55 3 40 6 30 70 90 45 35 9 7 50 50 255 4 80 255 1 45 5 2 75 4 Capacity

Miami 7

Jackson 5

100

Total optimal cost = $82,500.

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Atlanta location-optimal solution:

Shipping cost to Distribution Centers ($/case) Miami $7 $3 35 $2 70 70 90 45 $10 $8 10 50 Denver $2 55 $1 Lincoln $4 45 $5 40 $3 80 255 $2 75 Jackson $5 Capacity ( 100)

Plant Chicago Houston Atlanta Demand ( 100)

100

Total optimal cost = $57,500. The new plant should be located in Atlanta because the total cost is lower.

20.

Ajax International Company Using the Transportation Method solver, the optimal solution is found to be:
Destinations
W1 W2 W3 W4 W5 Dummy

Capacity 50,000 80,000 80,000 40,000 250,000

Sources
F1 F2 F3 F4 Reqt's

1 2 1 5

3 2 5 2

3 1 1 4 30,000

5 4 3 5 35,000

6 5 1 4

0 0 0 0

45,000 30,000

50,000 60,000

Destinations
W1 W2 W3 W4 W5 Dummy

Capacity 50,000 80,000 80,000 40,000 250,000

Sources F1 F2 F3 F4 Reqt's Totals

45,000 0 0 0 0 0 0 30,000 45,000 30,000

0 30,000 0 0 30,000

0 5,000 30,000 0 35,000

0 5,000 0 45,000 50,000 0 0 10,000 50,000 60,000

$45,000 $60,000 $30,000 $110,000 $50,000

$0 $295,000

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Total cost = ($45,000 + $60,000 + $30,000 + $20,000 + $90,000 + $50,000) = $295,000

21. Ajax International Company: Further Analysis Once again using Transportation Method solver, we get the optimal solution shown in the output that follows. With this solution: Total cost, revised problem = $45,000 + $60,000 + $30,000 + $140,000 + $200,000 = $475,000 Total cost, original problem = $295,000 The logistics manager should receive a budget increase of ($475,000 $295,000) = $180,000 for increased transportation costs. By shifting the shipping pattern, the increase in costs is less than the $210,000 requested.
Destinations
W1 W2 W3 W4 W5 Dummy

Capacity 50,000 80,000 90,000 --220,000

Sources
F1 F2 F4 --Reqt's

1 2 5

3 2 2

3 1 4

5 4 5

6 5 4

0 0 0

45,000

30,000

30,000

35,000

50,000 30,000

Destinations
W1 W2 W3 W4 W5 Dummy

Capacity 50,000 80,000 90,000 220,000

Sources F1 F2 F4 Reqt's Totals

45,000 0 0 45,000

0 0 30,000 30,000

0 30,000 0 30,000

0 35,000 0 35,000

0 5,000 0 15,000 50,000 10,000 50,000 30,000

$45,000 $60,000 $30,000 $140,000 $200,000

$0 $475,000

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22. Giant Farmer Company: Further AnalysisMemphis Plant The optimal solution is shown following. The total costs are $66,500. Because total shipping costs are higher with the Memphis location, this would not change the decision in Problem 19.
Shipping cost to Distribution Centers ($/case) Miami $7 $3 25 $3 70 70 90 $11 10 45 50 $6 Denver $2 65 $1 Lincoln $4 35 $5 50 $5 80 255 $2 75 Jackson $5 Capacity ( 100)

Supplier Chicago Houston Memphis Demand ( 100)

100

Total optimal cost = $66,500.

23. Chambers Corporation (using Transportation Method Solver) a. Alternative 1 (Portland)

Destinations
AT CO LA SE

Capacity 6,000 6,000 6,000 18,000

Sources
Baltimore Milwaukee Portland Reqt's

0.35 0.55 0.85 5,000

0.20 0.15 0.60 3,000

0.85 0.70 0.30 6,000 Destinations

0.75 0.65 0.10 4,000

AT

CO

LA

SE

Capacity 6,000 6,000 6,000 18,000 $6,050.00

Sources Baltimore Milwaukee Portland Reqt's Totals

5,000 0 0 5,000

1,000 2,000 0 3,000

0 4,000 2,000 6,000

0 0 4,000 4,000 $400.00

$1,750.00 $500.00 $3,400.00

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b. Alternative 2 (San Antonio)

Destinations
AT CO LA SE

Capacity 6,000 6,000 6,000 18,000

Sources
Baltimore Milwaukee San Antonio Reqt's

0.35 0.55 0.55 5,000

0.20 0.15 0.40 3,000

0.85 0.70 0.40 6,000 Destinations

0.75 0.65 0.55 4,000

AT

CO

LA

SE

Capacity 6,000 6,000 6,000 18,000 $7,250.00

Sources Baltimore Milwaukee San Antonio Reqt's Totals

5,000 0 0 5,000

1,000 2,000 0 3,000

0 0 6,000 6,000

0 4,000 0 4,000

$1,750.00 $500.00 $2,400.00 $2,600.00

c. Alternative 3 (Portland and San Antonio)

Destinations
AT CO LA SE

Capacity 6,000 6,000 3,000 3,000 18,000

Sources
Baltimore Milwaukee Portland San Antonio

0.35 0.55 0.85 0.55 5,000

0.20 0.15 0.60 0.40 3,000

0.85 0.70 0.30 0.40 6,000 Destinations

0.75 0.65 0.10 0.55 4,000

Reqt's

AT

CO

LA

SE

Capacity 6,000 6,000 3,000 3,000 18,000 $6,500.00

Sources
Baltimore Milwaukee Portland San Antonio

5,000 0 0 0 5,000

1,000 2,000 0 0 3,000

0 3,000 0 3,000 6,000

0 1,000 3,000 0 4,000 $950.00

Reqt's Totals

$1,750.00 $500.00 $3,300.00

Alternative 1 (Portland) with a minimum total cost of $605,000 is the best. Alternative 2 (San Antonio) has a minimum total cost of $725,000. Alternative 3 (Portland and San Antonio) has a minimum total cost of $650,000.

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CASE: INDUSTRIAL REPAIR. Inc. *

Analysis of the current situation

Using the mileage solver, we determined that based on last years data, the costs at 26 Arbor St. location are as follows. Mileage cost = 29,338 miles (one-way) *2 (to make two-way)* $2/mile =$117,352 Travel Time (technician expense) = 33,555 minutes (one-way) *2 (to make two-way)*$150/hour * 1 hour/60 minutes = $167,773 Total transportation related costs = $117,352 + $167,773 = $285,125 Analyzing the results of the Mileage Solver, 34% of all trips to customers were within 30 minutes or less. Using the customer data available on Student CD-ROM, determine the best location if IR decides to use only one facility. Be sure to report on the net present value (NPV) using a ten year horizon for this relocation and the percentage of repairs that are within 30 minutes of the chosen location. Note: with this option we must pay $100,000 (which we depreciate using ten year straight-line depreciation). The best location we found is 16 Hart Ave, Meriden, CT 6450 The one-way mileage and travel time are 25,690 miles and 29,194 minutes, respectively. This results in a total transportation related cost of $248,731. Analyzing the results of the Mileage Solver, 52% of all trips to customers were 30 minute or less.

Question 1

To use the Financial Solver, we must determine the marginal costs and investments for this proposal. We must invest an extra $100,000 in year 0, and the reduction in expenses is $36,393 (or $285,125 $248,731). Plugging this into the Financial Solver, we get a NPV of $45,979.

This case was prepared by Dr. Brooke Saladin, Wake Forest University, as a basis for classroom discussion.

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Inputs Solver - Financial Analysis Enter data in yellow shaded areas. Use the dropdown list to set depreciation type. If you use straight-line depreciation, use the spinner control to set number of years in the horizon
Investment amount Starting year Depreciation type Years Discount rate Tax Rate (as percent) Year Revenue Expenses: Variable Expenses: Fixed Depreciation (D) Pre-tax income Taxes (40%) Net Operating Income (NOI) Total Cash Flow (NOI + D)

$100,000 0 StraightLine 10 12.0% 40% 1 2 3

Net Present Value Internal Rate of Return Payback Period

$45,978 22.4% 3.87 years

10

(36,393) (36,393) (36,393) (36,393) (36,393) (36,393)

(36,393) (36,393) (36,393) (36,393)

10,000 26,393 10,557 15,836 $25,836

10,000 26,393 10,557 15,836 $25,836

10,000 26,393 10,557 15,836 $25,836

10,000 26,393 10,557 15,836 $25,836

10,000 26,393 10,557 15,836 $25,836

10,000 26,393 10,557 15,836 $25,836

10,000 26,393 10,557 15,836 25,836

10,000 26,393 10,557 15,836 25,836

10,000 26,393 10,557 15,836 25,836

10,000 26,393 10,557 15,836 25,836

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Question 2

Using the customer data available on Student CD-ROM, determine the best location for the new site if IR decides to use two facilities (retaining the existing site for the first one). Be sure to report on the NPV using a ten year horizon for this relocation and the percentage of repairs that are within 30 minutes of the chosen locations. The best location we found is 240 Kimberly Ave., New Haven, CT 6519 (along with our present location of 26 Arbor St). The one-way mileage and travel time are 19,459 miles and 22,921 minutes, respectively. This results in a Total transportation related cost of $192,442. Analyzing the results of the Mileage Solver, 66% of all trips to customers were 30 minute or less.

To use the Financial Solver, we must determine the marginal costs and investments for this proposal. We must invest an extra $100,000 in year 0 and the reduction in expenses is $22,682 or $285,125 - $192,442 $70,000 (the operating cost for an additional facility). Plugging this into the Financial Solver, we get a NPV of -$502.

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Inputs Solver - Financial Analysis Enter data in yellow shaded areas. Use the dropdown list to set depreciation type. If you use straight-line depreciation, use the spinner control to set number of years in the horizon
Investment amount Starting year Depreciation type Years Discount rate Tax Rate (as percent) Year Revenue Expenses: Variable Expenses: Fixed Depreciation (D) Pre-tax income Taxes (40%) Net Operating Income (NOI) Total Cash Flow (NOI + D)

$100,000 0 StraightLine 10 12.0% 40% 1 2 3

Net Present Value Internal Rate of Return Payback Period

-$502 11.9% 5.68 years

10

(22,682) (22,682) (22,682) (22,682) (22,682) (22,682) (22,682) (22,682) (22,682) (22,682) 10,000 12,682 5,073 7,609 $17,609 10,000 12,682 5,073 7,609 $17,609 10,000 12,682 5,073 7,609 $17,609 10,000 12,682 5,073 7,609 $17,609 10,000 12,682 5,073 7,609 $17,609 10,000 12,682 5,073 7,609 $17,609 10,000 12,682 5,073 7,609 17,609 10,000 10,000 12,682 12,682 5,073 5,073 7,609 7,609 17,609 17,609 10,000 12,682 5,073 7,609 17,609

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Question 3 What should Andrew recommend? Provide an explanation for supporting the recommendation.

On the basis of the NPV analysis, it appears that we should simply relocate our facility since that outcome has a positive net present value and the two location model has a negative net present value. However, let us examine a boxplot comparing the one-way travel times under each option. Plot of one-way travel time for three scenarios

240 Kimberly Ave along with present location

16 Hart Ave

Use current location only

20

40

60

80

(The scale is in minutes. The center dots indicate the mean one-way travel time for that scenario. The left vertical line in the boxes is the 25th percentile; the middle vertical line is the 50th percentile, and; the right vertical line is the 75th percentile.) It is clear that the two location option has significant travel time advantages over the other options. As noted in the case, the proximity to the customer is becoming an increasingly important factor in attracting and retaining customers. The two location option provides a better competitive position, and it would only take an increase of a marginal $13,711 to make the two alternatives equal regarding NPV.

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CASE: R. U. Reddie for Location

A. Overview Rhonda Reddie, owner and CEO of a company that manufactures wardrobes for stuffed animals, is faced with the prospect of sizeable demand increases in the near future with insufficient capacity to take advantage of it. Expanding capacity at her existing plants is not an option for various reasons. Consequently, she must decide if it is a good idea to increase capacity by purchasing a new plant. If the answer is yes, then she must decide where the plant should be located. The two options she would consider are St. Louis and Denver. B. Purpose This case was written to provide the student with enough data to analyze the decisions Reddie must make, using tools such as linear programming and net present values. Reddie has a number of concerns regarding the quality of the data she has to work with, which offers the opportunity for students to do sensitivity analysis with the models. Students learn where the cost figures come from that are used in the cash flow analysis and net present value calculations. In this case, the location decision will affect the cost of goods sold because of differing cost factors at each location which affect the distribution patterns in the supply network. In addition, the capital costs of the plant and equipment differ by location, as does the cost of the land. Consequently, the location decision affects annual operating costs, the extent of the capital investment, and hence the financial results as represented by the net present value of the investment. Instructors can use the case to demonstrate the cross-functional aspects of these major decisions in practice. C. Linear Programming Models Appendix A contains the linear programming models for Denver and St. Louis in matrix form. The models determine the optimal shipping pattern if Denver or St. Louis are the chosen locations. The objective function value is the optimal cost of goods sold for the entire network of plants with a given option for the new fourth plant. The demand data are the most likely estimates given in the case. Students will have to determine the objective function coefficients, which consist of the variable production cost per unit at a plant plus the transportation cost to ship one unit from the plant to one of the destinations in the supply chain. The distribution cost is $0.0005: The actual cost to ship to another destination will depend on the number of miles the unit must be shipped. For example, the cost to produce one unit in Cleveland and ship it to Boston is $3.00 + $0.0005 (650 miles) = $3.325.

Appendix A contains two models for each location option because the new plant can only produce 500,000 units the first year, and the demand increases for the first year are less than those projected for years 2 and beyond. In the second year the new plant can produce 900,000 units. The capacity of the network with the new plant is sufficient to handle any foreseeable contingencies. These models must be used a number of times to analyze the issues in the case.

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D. Optimal Distribution Plans for each Location There are actually two distribution plans for each location: One for year 1 and another for years 2 and beyond. The tables below provide the optimal distribution plans and costs. Denver

From
Boston

To
Boston St. Louis Cleveland St. Louis Chicago St. Louis Denver Denver St. Louis

Year 1
80 220 200 200 370 20 110 500 NONE

Years 2 to 10
140 60 260 140 430 70 NONE 670 230

Cleveland

Chicago

Denver

The Total Cost of Goods Sold ($000)for the Denver alternative is: Year 1 $5790 Years 2 10 $6606.25 per year
St. Louis

From
Boston

To
Boston Denver Chicago Cleveland Chicago Chicago Denver St. Louis Denver

Year 1
80 220 NONE 200 200 170 330 440 60

Years 2 to 10
140 NONE 60 260 140 230 270 500 400

Cleveland

Chicago

St. Louis

The Total Cost of Goods Sold ($000)for the St. Louis alternative is: Year 1 $5935.50 Years 2 10 $6689.50 per year Several things can be noted at this stage. First, on the basis of variable costs (COGS) alone, Denver seems to be the best choice. However, as we shall see later, other financial considerations must be made. Second, the distribution assignments (i.e., which warehouses must be serviced by each plant) differ slightly in going from the first to the second years. If they are not changed, the lowest costs will not be realized. Also, the distribution plans for Denver are quite different than those for St. Louis. The implication is that the location decision affects the distribution assignments of all plants in the network, not just the new plant being added to the network. Appendix B contains the linear programming solutions, which show not only the optimal

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distribution plans but also the shadow prices and constraint ranges that are useful for decision making.
E. Net Present Value One important measure of the viability of a location decision involving capital outlays is the use of a net present value (NPV) criterion. However, in this case we must compute incremental cash flows because the new plant is to be used as a member of an existing network of plants. The only measures of cash flow we get here is the total system COGS with and without the new investment. The case gives the COGS for a Status Quo (without the new plants) solution so that these incremental costs attributable to the new investment can be computed. For example, the Denver alternative will generate the following incremental COGS ($000):

Year 1 Years 2-10

Denver $5790 $6606

Status Quo $4692 $4554

= =

Incremental COGS $1098 $2052

The revenue flows due to the addition of a new plant are the same regardless of the location. In year 1, 400 (000) additional units can be sold at a price of $8 per unit, for an incremental addition of $3200. In years 2 and beyond, 700 (000) additional units will generate $5600 in incremental revenues. Given the assumptions regarding taxes, depreciation, and the data on capital costs, land costs, and annual fixed costs listed in the case, a spreadsheet can be constructed to compute the NPV for each alternative. NOTE: The terminal value of the project is 50% of the combined land and plant and equipment costs, while the tax is 40% of the terminal value of the project net of the initial land cost. The NPV calculations for the two alternatives are given in Appendix C. Note that now St. Louis appears to be the better alternative. The NPV for Denver is $936.35 versus the NPV for St. Louis of $1058.62. The reason for this switch is that Denvers capital costs are higher than St. Louis, enough to offset its advantage in annual COGS. St. Louis is the better investment while Denver would require less annual operating capital.
F. Sensitivity Analysis The case raised some questions about the quality of the data used to make this important decision. The models can be used to explore the implications of errors in the data used in the analysis. In each case taken separately, the question is whether the decision to go to St. Louis would be reversed. Demand Changes Equally Divided for Each Destination

In this analysis, the following issue is raised: If forecast errors are in the range of + 10% across the board, will the location decision be affected? Running the linear programming model for years 2 to 10 for each alternative and recalculating the incremental revenue and COGS for the conditions of 10% increases and 10% decreases, we find the following NPV results:

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10% Increase 10% Decrease

Denver $3243.52 -$1608.01

St. Louis $3196.47 -$1324.34

If demands are 10 percent higher, Denver is best. However, if demands are 10 percent lower, St. Louis is best but the NPVs are negative. The question of how confident Reddie is about the forecasts should be discussed. If there is a good chance of the lower demands materializing, the whole issue of capacity expansion should be revisited.
Shift in Market Concentration to the West

The question is whether the location decision is affected by a shift in the demand concentration to the West. The linear programming models must be revised and rerun to reflect the different demand pattern, where St. Louis is now 550 (000) and Denver is now 820 (000). The NPVs are now: Denver: $3281.30 St. Louis: $3036.94 While both alternatives yield good returns, Denver is now a little better than St. Louis. The reason is that the Denver location is particularly well positioned since the preponderance of the new demands are projected for that city. The COGS goes down relative to St. Louis, thereby offsetting Denvers larger capital costs.
Changes in the COGS Estimates for Each Alternative

How sensitive is the solution to the estimates in the variable production costs and the transportation costs for Denver and St. Louis. Would an error of 10% make a difference? In this analysis the linear programming models must be modified (both the first year and the years 2 to 10 models) to reflect the changes to the objective function values for the variables associated with the new plants only. New incremental cash flows must be computed and used in a NPV analysis. The resulting NPVs are: 10% Increase in COGS 10% Decrease in COGS
Denver -$27.28 $1,898.49 St. Louis $ 102.65 $2,020.36

If the estimates for the COGS of each alternative both increase or decrease, the decision to go to St. Louis is still unchanged. However, if the estimates for the COGS for Denver were supposed to be 10% lower than the base case while the estimates for St. Louis were supposed to be 10% higher, then the decision is clearly to go to Denver. The instructor can discuss the costs that make up variable production costs and why there may be errors in estimating them. Such costs would include: Materials (a function of the negotiated prices with suppliers; actual quality) Labor (available skills and productivity, training, wage packages) Machine costs (power, repair, speeds, quality) Changeover (actual run sizes, product mix)

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In addition, actual transportation costs will also vary depending on the chosen mode of transportation (rail, truck, air) and the reliability of the carrier. Considerations in the mode choice depend on whether speed, on-time delivery, or costs are the most important consideration in distribution. This analysis shows that estimating the COGS accurately is important for this decision.
Changes in the Estimates of Fixed Annual Costs for Each Alternative

A similar conclusion can be drawn regarding the annual fixed costs. In this analysis only the spreadsheet containing the NPV analysis need be revised and recalculated because the linear programming models do not contain annual fixed costs. The category annual fixed costs includes administration, utilities not directly associated with producing a unit of product, insurance, and any other overhead cost that does not vary with output. Would the decision to go to St. Louis be changed if there were errors of 10 % in the annual fixed costs for each alternative? The NPVs are: 10% Increase in Fixed Costs 10% Decrease in Fixed Costs
Denver $ 742.01 $1,130.69 St. Louis $ 793.61 $1,323.63

We see that if the fixed costs for Denver used in the base case should have been 10% lower, while the fixed costs for St. Louis in the base case should have been 10% higher, the decision would now be to go to Denver. Otherwise, if both estimates were low or high, the decision would not change. The instructor can discuss the various cost elements that comprise annual fixed costs and the potential for estimation errors in situations such as this one.
Reducing Production in Cleveland

Reddie is contemplating cutting back production by 50 (000) units annually from years 2 and beyond for Cleveland. This option is feasible from a capacity perspective so long as a new plant is in the system. This decision can be approached without rerunning any of the models in the following way. The shadow price and the right-hand-side range for Clevelands capacity from the base solution (most likely demands) for each alternative are useful (See Appendix B). The new change in COGS equals the old change in COGS plus 50 times the shadow price on Cleveland capacity. For example, using the solution for Denver (years 2 10) in the base case (Appendix B), and the NPV for the Denver base case (Appendix C), we get: New change in COGS = $2052 + 50($1.100) = $2107. This estimate can now be used in the NPV model to get the desired results.
Denver: $771.74 St. Louis: $890.27

We see that the St. Louis alternative would be better than Denver.

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F. Conclusions The sensitivity analysis demonstrated that the following data are critical to the decision at hand: (1) demand increase, (2) forecast of a market shift, and (3) estimates of the COGS and fixed costs. Any reasonable errors in these data could cause a reversal of the decision. Reddie must be confident in the accuracy of the data before going further.

Finally, the case raised some non-quantitative factors in this decision. The instructor should press the students as to how they would reconcile these factors, particularly since two of the three favor Denver. One way to rationalize the decision is to use a preference matrix where each alternative can be scored subjectively across all the major criteria. For example, using the base case in which St. Louis had the best NPV, we might have the following matrix where a score of 5 is excellent and a 1 is poor:
Factor Weight Denver St. Louis

Workforce availability Environmental restrictions Supplier availability NPV

0.20 0.10 0.20 0.50

4 2 5 4 4.0

2 3 3 5 3.8

With this arbitrary example, Denver would get the nod for the new plant. Obviously, the analysis depends on the scores and weights.

Appendix A
Denver LP Year 1
Min-Z B-B 3.8 B-CL 4.125 B-CH 4.3 B-SL 4.4 B-D 4.8 CL-B 3.325 CL-CL 3 CL-CH 3.175 CL-SL 3.3 CL-D 3.7 CH-B 3.75 CH-CL 3.425 CH-CH 3.25 CH-SL 3.4 CH-D 3.75 D-B 4.15 D-CL 3.85 D-CH 3.65 D-SL 3.575 D-D 3.15 <=/=> = < < < < = = = = = RHV Z

B CL CH D BDEM CLDEM CHDEM SLDEM DDEM

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

1 1 1 1

1 1

400 400 500 500 80 200 370 440 610

Denver LP Years 2-10

Min-Z B-B 3.8 B-CL 4.125 B-CH 4.3 B-SL 4.4 B-D 4.8 CL-B 3.325 CL-CL 3 CL-CH 3.175 CL-SL 3.3 CL-D 3.7 CH-B 3.75 CH-CL 3.425 CH-CH 3.25 CH-SL 3.4 CH-D 3.75 D-B 4.15 D-CL 3.85 D-CH 3.65 D-SL 3.575 D-D 3.15 <=/=> = < < < < = = = = = RHV Z

B CL CH D BDEM CLDEM CHDEM SLDEM DDEM

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

1 1 1 1

1 1

400 400 500 900 140 260 430 500 670

St. Louis LP Year 1

Min-Z B-B 3.8 B-CL 4.125 B-CH 4.3 B-SL 4.4 B-D 4.8 CL-B 3.325 CL-CL 3 CL-CH 3.175 CL-SL 3.3 CL-D 3.7 CH-B 3.75 CH-CL 3.425 CH-CH 3.25 CH-SL 3.4 CH-D 3.75 SL-B 3.65 SL-CL 3.35 SL-CH 3.2 SL-SL 3.05 SL-D 3.475 <=/= >= < < < < = = = = = RHV Z

B CL CH SL BDEM CLDEM CHDEM SLDEM DDEM

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

1 1 1 1

1 1

400 400 500 500 80 200 370 440 610

St. Louis LP Years 2-10

B-B Min-Z 3.8 B-CL 4.125 B-CH 4.3 B-SL 4.4 B-D 4.8 CL-B 3.325 CL-CL 3 CL-CH 3.175 CL-SL 3.3 CL-D 3.7 CH-B 3.75 CH-CL 3.425 CH-CH 3.25 CHSL 3.4 CH-D 3.75 SL-B 3.65 SL-CL 3.35 SL-CH 3.2 SL-SL 3.05 SL-D 3.475 <=/=> = < < < < = = = = = RHV Z

B CL CH SL BDEM CLDEM CHDEM SLDEM DDEM

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

1 1 1 1

1 1

400 400 500 900 140 260 430 500 670

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Appendix B
Denver LP Year 1
Results

Denver LP Years 2-10

Results

Solver - Linear Programming

Solution
Variable Label B-B B-CL B-CH B-SL B-D CL-B CL-CL CL-CH CL-SL CL-D CH-B CH-CL CH-CH CH-SL CH-D D-B D-CL D-CH D-SL D-D Constraint Label B CL CH D BDEM CLDEM CHDEM SLDEM DDEM Variable Value 80.0000 0.0000 0.0000 220.0000 0.0000 0.0000 200.0000 0.0000 200.0000 0.0000 0.0000 0.0000 370.0000 20.0000 110.0000 0.0000 0.0000 0.0000 0.0000 500.0000 Original RHV 400 400 500 500 80 200 370 440 610 Original Coefficient 3.8000 4.1250 4.3000 4.4000 4.8000 3.3250 3.0000 3.1750 3.3000 3.7000 3.7500 3.4250 3.2500 3.4000 3.7500 4.1500 3.8500 3.6500 3.5750 3.1500 Slack or Surplus 100 0 0 0 0 0 0 0 0 Coefficient Sensitivity 0 0.0250 0.0500 0 0.0500 0.6250 0 0.0250 0 0.0500 0.9500 0.3250 0 0 0 1.9500 1.3500 1.0000 0.7750 0 Shadow Price 0 -1.1000 -1.0000 -1.6000 3.8000 4.1000 4.2500 4.4000 4.7500 Variable Label B-B B-CL B-CH B-SL B-D CL-B CL-CL CL-CH CL-SL CL-D CH-B CH-CL CH-CH CH-SL CH-D D-B D-CL D-CH D-SL D-D Constraint Label B CL CH D BDEM CLDEM CHDEM SLDEM DDEM

Solver - Linear Programming

Solution
Variable Value 140.0000 0.0000 0.0000 60.0000 0.0000 0.0000 260.0000 0.0000 140.0000 0.0000 0.0000 0.0000 430.0000 70.0000 0.0000 0.0000 0.0000 0.0000 230.0000 670.0000 Original RHV 400 400 500 900 140 260 430 500 670 Original Coefficient 3.8000 4.1250 4.3000 4.4000 4.8000 3.3250 3.0000 3.1750 3.3000 3.7000 3.7500 3.4250 3.2500 3.4000 3.7500 4.1500 3.8500 3.6500 3.5750 3.1500 Slack or Surplus 200 0 0 0 0 0 0 0 0 Coefficient Sensitivity 0 0.0250 0.0500 0 0.8250 0.6250 0 0.0250 0 0.8250 0.9500 0.3250 0 0 0.7750 1.1750 0.5750 0.2250 0 0 Shadow Price 0 -1.1000 -1.0000 -0.8250 3.8000 4.1000 4.2500 4.4000 3.9750

5790 Objective Function Value: Sensitivity Analysis and Ranges Objective Function Coefficient Variable Label B-B B-CL B-CH B-SL B-D CL-B CL-CL CL-CH CL-SL CL-D CH-B CH-CL CH-CH CH-SL CH-D D-B D-CL D-CH D-SL D-D Constraint Label B CL CH D BDEM CLDEM CHDEM SLDEM DDEM Lower Limit No Limit 4.1000 4.2500 3.7750 4.7500 2.7000 3.0000 3.1750 3.3000 3.7000 3.7500 3.4250 3.2500 3.4000 3.7500 4.1500 3.8500 3.6500 3.5750 3.1500 Lower Limit 300 300 480 480 4.43379E-11 -1.02318E-10 150 220 500 Original Coefficient 3.8000 4.1250 4.3000 4.4000 4.8000 3.3250 3.0000 3.1750 3.3000 3.7000 3.7500 3.4250 3.2500 3.4000 3.7500 4.1500 3.8500 3.6500 3.5750 3.1500 Upper Limit 4.4250 No Limit No Limit 4.4250 No Limit No Limit 3.0000 3.1750 3.3000 3.7000 3.7500 3.4250 3.2500 3.4000 3.7500 4.1500 3.8500 3.6500 3.5750 3.1500

Objective Function Value: 6606.25 Sensitivity Analysis and Ranges Objective Function Coefficient Variable Label B-B B-CL B-CH B-SL B-D CL-B CL-CL CL-CH CL-SL CL-D CH-B CH-CL CH-CH CH-SL CH-D D-B D-CL D-CH D-SL D-D Constraint Label B CL CH D BDEM CLDEM CHDEM SLDEM DDEM Lower Limit No Limit 4.1000 4.2500 3.7750 3.9750 2.7000 3.0000 3.1750 3.3000 3.7000 3.7500 3.4250 3.2500 3.4000 3.7500 4.1500 3.8500 3.6500 3.5750 3.1500 Lower Limit 200 260 430 700 0 200 370 440 610 Original Coefficient 3.8000 4.1250 4.3000 4.4000 4.8000 3.3250 3.0000 3.1750 3.3000 3.7000 3.7500 3.4250 3.2500 3.4000 3.7500 4.1500 3.8500 3.6500 3.5750 3.1500 Upper Limit 4.4250 No Limit No Limit 4.4250 No Limit No Limit 3.0000 3.1750 3.3000 3.7000 3.7500 3.4250 3.2500 3.4000 3.7500 4.1500 3.8500 3.6500 3.5750 3.1500

Right-Hand-Side Values Original Upper Value Limit 400 No Limit 400 620 500 720 500 610 80 180.0000001 200 300 370 390 440 540 610 630

Right-Hand-Side Values Original Upper Value Limit 400 No Limit 400 460 500 560 900 960 140 340 260 400 430 500 500 700 670 870

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Appendix B

St. Louis LP Year 1

Results
Solution

St. Louis LP Years 2-10

Results

Solver - Linear Programming

Variable Label B-B B-CL B-CH B-SL B-D CL-B CL-CL CL-CH CL-SL CL-D CH-B CH-CL CH-CH CH-SL CH-D SL-B SL-CL SL-CH SL-SL SL-D Constraint Label B CL CH SL BDEM CLDEM CHDEM SLDEM DDEM Variable Value 80.0000 0.0000 0.0000 0.0000 220.0000 0.0000 200.0000 200.0000 0.0000 0.0000 0.0000 0.0000 170.0000 0.0000 330.0000 0.0000 0.0000 0.0000 440.0000 60.0000 Original RHV 400 400 500 500 80 200 370 440 610 Original Coefficient 3.8000 4.1250 4.3000 4.4000 4.8000 3.3250 3.0000 3.1750 3.3000 3.7000 3.7500 3.4250 3.2500 3.4000 3.7500 3.6500 3.3500 3.2000 3.0500 3.4750 Slack or Surplus 100 0 0 0 0 0 0 0 0 Coefficient Sensitivity 0 0 0 0.0250 0 0.6500 0 0 0.0500 0.0250 1.0000 0.3500 0 0.0750 0 1.1750 0.5500 0.2250 0 0 Shadow Price 0 -1.1250 -1.0500 -1.3250 3.8000 4.1250 4.3000 4.3750 4.8000 Variable Label B-B B-CL B-CH B-SL B-D CL-B CL-CL CL-CH CL-SL CL-D CH-B CH-CL CH-CH CH-SL CH-D SL-B SL-CL SL-CH SL-SL SL-D Constraint Label B CL CH SL BDEM CLDEM CHDEM SLDEM DDEM

Solver - Linear Programming

Solution
Variable Value 140.0000 0.0000 60.0000 0.0000 0.0000 0.0000 260.0000 140.0000 0.0000 0.0000 0.0000 0.0000 230.0000 0.0000 270.0000 0.0000 0.0000 0.0000 500.0000 400.0000 Original RHV 400 400 500 900 140 260 430 500 670 Original Coefficient 3.8000 4.1250 4.3000 4.4000 4.8000 3.3250 3.0000 3.1750 3.3000 3.7000 3.7500 3.4250 3.2500 3.4000 3.7500 3.6500 3.3500 3.2000 3.0500 3.4750 Slack or Surplus 200 0 0 0 0 0 0 0 0 Coefficient Sensitivity 0 0 0 0.0250 0 0.6500 0 0 0.0500 0.0250 1.0000 0.3500 0 0.0750 0 1.1750 0.5500 0.2250 0 0 Shadow Price 0 -1.1250 -1.0500 -1.3250 3.8000 4.1250 4.3000 4.3750 4.8000

Objective Function Value: 5935.5 Sensitivity Analysis and Ranges Objective Function Coefficient Variable Label B-B B-CL B-CH B-SL B-D CL-B CL-CL CL-CH CL-SL CL-D CH-B CH-CL CH-CH CH-SL CH-D SL-B SL-CL SL-CH SL-SL SL-D Constraint Label B CL CH SL BDEM CLDEM CHDEM SLDEM DDEM Lower Limit No Limit 4.1250 4.3000 4.3750 4.1500 2.6750 3.0000 3.1750 3.3000 3.7000 3.7500 3.4250 3.250 3.4000 3.7500 3.6500 3.3500 3.2000 3.0500 3.4750 Lower Limit 300 300 400 440 4.43379E-11 30 200 220 390 Original Upper Coefficient Limit 3.8000 4.4500 4..1250 No Limit 4.3000 No Limit 4.4000 No Limit 4.8000 4.8000 3.3250 No Limit 3.0000 3.0000 3.1750 3.1750 3.3000 3.3000 3.7000 3.7000 3.7500 3.7500 3.4250 3.4250 3.2500 3.2500 3.4000 3.4000 3.7500 3.7500 3.6500 3.6500 3.3500 3.3500 3.2000 3.2000 3.0500 3.0500 3.4750 3.4750 Right-Hand-Side Values Original Upper Value Limit 400 No Limit 400 570 500 720 500 720 80 180 200 300 370 470 440 500 610 710

Objective Function Value: 6689.5 Sensitivity Analysis and Ranges Objective Function Coefficient Variable Label B-B B-CL B-CH B-SL B-D CL-B CL-CL CL-CH CL-SL CL-D CH-B CH-CL CH-CH CH-SL CH-D SL-B SL-CL SL-CH SL-SL SL-D Constraint Label B CL CH SL BDEM CLDEM CHDEM SLDEM DDEM Lower Limit No Limit 4.1250 3.6500 4.3750 4.8000 2.6750 3.0000 3.1750 3.3000 3.7000 3.7500 3.4250 3.2500 3.4000 3.7500 3.6500 3.3500 3.2000 3.0500 3.4750 Lower Limit 200 260 300 700 0 200 370 440 610 Original Upper Coefficient Limit 3.8000 4.4500 4.1250 No Limit 4.3000 4.3000 4.4000 No Limit 4.8000 No Limit 3.3250 No Limit 3.0000 3.0000 3.1750 3.1750 3.3000 3.3000 3.7000 3.7000 3.7500 3.7500 3.4250 3.4250 3.2500 3.2500 3.4000 3.4000 3.7500 3.7500 3.6500 3.6500 3.3500 3.3500 3.2000 3.2000 3.0500 3.0500 3.4750 3.4750 Right-Hand-Side Values Original Upper Value Limit 400 No Limit 400 460 500 560 900 960 140 340 260 400 430 630 500 700 670 870

Appendix C
Denver Location NPVMost Likely
Denver
0
Profit or Loss

10

Change in Revenues COGS Gross Profit Depreciation Fixed Costs EBIT Taxes Profit After Tax
Cash Flows

3200 1098 2102 1210 550 342 136.8 205.2

5600 2052 3548 1210 550 1788 715.2 1072.8

5600 2052 3548 1210 550 1788 715.2 1072.8

5600 2052 3548 1210 550 1788 715.2 1072.8

5600 2052 3548 1210 550 1788 715.2 1072.8

5600 2052 3548 1210 550 1788 715.2 1072.8

5600 2052 3548 1210 550 1788 715.2 1072.8

5600 2052 3548 1210 550 1788 715.2 1072.8

5600 2052 3548 1210 550 1788 715.2 1072.8

5600 2052 3548 1210 550 1788 715.2 1072.8

Add Back Depreciation Other Cash Flows Initial Plant & Equip Costs Land Cost Sale of New Plant Tax on Gain Free Cash Flow NPV @ 11%

1415.2 12100 1200

2282.8

2282.8

2282.8

2282.8

2282.8

2282.8

2282.8

2282.8

2282.8

6650 -2180 1415.2 $936.35 2282.8 2282.8 2282.8 2282.8 2282.8 2282.8 2282.8 2282.8 6752.8

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Appendix C
St. Louis Location NPVMost Likely
St. Louis
0
Profit or Loss

10

Change in Revenues COGS Gross Profit Depreciation Fixed Costs EBIT Taxes Profit After Tax
Cash Flows

3200 1244 1956 1080 750 126 50.4 75.6

5600 2135.5 3464.5 1080 750 1634.5 653.8 980.7

5600 2135.5 3464.5 1080 750 1634.5 653.8 980.7

5600 2135.5 3464.5 1080 750 1634.5 653.8 980.7

5600 2135.5 3464.5 1080 750 1634.5 653.8 980.7

5600 2135.5 3464.5 1080 750 1634.5 653.8 980.7

5600 2135.5 3464.5 1080 750 1634.5 653.8 980.7

5600 2135.5 3464.5 1080 750 1634.5 653.8 980.7

5600 2135.5 3464.5 1080 750 1634.5 653.8 980.7

5600 2135.5 3464.5 1080 750 1634.5 653.8 980.7

Add Back Depreciation Other Cash Flows Initial Plant & Equip Costs Land Cost Sale of New Plant Tax on Gain Free Cash Flow NPV @ 11%

1155.6 10800 800

2060.7

2060.7

2060.7

2060.7

2060.7

2060.7

2060.7

2060.7

2060.7

5800 -2000 1155.6 $1,058.62 2060.7 2060.7 2060.7 2060.7 2060.7 2060.7 2060.7 2060.7 5860.7