please construct a decision tree and calculate what the net present value of total cost incurred will be if ElegantWood selects the first online supplier for the purchase of wood.
ElegantWood is a manufacturer of modern style furniture and accessories. It considers two online suppliers to purchase its main material wood. Both online suppliers provide a similar price and shipping rate. Their service levels and lead times are also similar. However, they have a quite different charging structures. The first online supplier charges 5 percent commission on the market price of wood while the second online supplier requires a subscription fee of $10 million as an up-front payment for a 2-year period. The second online supplier also charges a commission of1 percent on the market price of wood. Even though ElegantWood spends about $150 million on the purchase of wood each year, this amount varies depending on utilization. Production manager thinks that the next year's utilization will potentially be high and keep the wood spending at $150 million level. However, he also predicts that there is a 25 percent chance that the spending will drop by 10 percent. For the second year, he assumes that the spending level will stay where it was in the first year with a probability of 0.5 and it will drop by another 10 percent with a probability of 0.5. Assuming a discount rate of 35 percent and all costs are incurred at the beginning of each year, please construct a decision tree and calculate what the
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