Period 0 Period 1 Period 2

D P probability D P probability D
100000 70 0.24 120000 63 0.24 144000
0.36 144000
0.24 108000
0.16 108000

0.36 120000 84 0.24 144000

0.36 144000
0.24 108000
0.16 108000

0.24 90000 84 0.24 108000

0.36 108000
0.24 81000
0.16 81000

0.16 90000 63 0.24 108000

0.36 108000
0.24 81000
0.16 81000

Probablity Prob
Demand 1.2 0.6
0.9 0.4
Price 1.2 0.6
0.9 0.4
P
56.7
75.6
75.6
56.7

75.6
100.8
100.8
75.6

75.6
100.8
100.8
75.6

56.7
75.6
75.6
56.7
 Buy from spot market only:

Node in Period 2
Profit in period 2
Prob D P
1 0.24 144000 56.7 $ 13,435,200.00
0.36 144000 75.6 $ 10,713,600.00
0.24 108000 75.6 $ 8,035,200.00
0.16 108000 56.7 $ 10,076,400.00
2 0.24 144000 75.6 $ 10,713,600.00
0.36 144000 100.8 $ 7,084,800.00
0.24 108000 100.8 $ 5,313,600.00
0.16 108000 75.6 $ 8,035,200.00
3 0.24 108000 75.6 $ 8,035,200.00
0.36 108000 100.8 $ 5,313,600.00
0.24 81000 100.8 $ 3,985,200.00
0.16 81000 75.6 $ 6,026,400.00
4 0.24 108000 56.7 $ 10,076,400.00
0.36 108000 75.6 $ 8,035,200.00
0.24 81000 75.6 $ 6,026,400.00
0.16 81000 56.7 $ 7,557,300.00

Node in Period 1
Profit in period 1
Prob D P
0.24 120000 63 $10,440,000
0.36 120000 84 $7,920,000
0.24 90000 84 $5,940,000
0.16 90000 63 $7,830,000

Node in Period 0
Profit in period 0
D P
100000 70 $8,000,000

SELL PRICE 150

Spot cost 70
Expected profit in period 2 Expected Value in Period 1
$10,622,016 $19,291,680
$7,682,688 $14,322,240
$5,762,016 $10,741,680
$7,966,512 $14,468,760

Expected Value in period 1 Net Present Value (NPV)

$14,679,014.40 $20,232,512
 Sign 3-year contract:

Node in Period 2

from from spot Profit in period 2

Prob D P contract market

1 0.24 144000 56.7 100000 44000 $ 14,105,200.00

0.36 144000 75.6 100000 44000 $ 13,273,600.00
0.24 108000 75.6 100000 8000 $ 10,595,200.00
0.16 108000 56.7 100000 8000 $ 10,746,400.00
2 0.24 144000 75.6 100000 44000 $ 13,273,600.00
0.36 144000 100.8 100000 44000 $ 12,164,800.00
0.24 108000 100.8 100000 8000 $ 10,393,600.00
0.16 108000 75.6 100000 8000 $ 10,595,200.00
3 0.24 108000 75.6 100000 8000 $ 10,595,200.00
0.36 108000 100.8 100000 8000 $ 10,393,600.00
0.24 81000 100.8 100000 0 $ 7,150,000.00
0.16 81000 75.6 100000 0 $ 7,150,000.00
4 0.24 108000 56.7 100000 8000 $ 10,746,400.00
0.36 108000 75.6 100000 8000 $ 10,595,200.00
0.24 81000 75.6 100000 0 $ 7,150,000.00
0.16 81000 56.7 100000 0 $ 7,150,000.00

Sell Price 150

Contract price 50
spot price 70
Node in Period 1

from from spot Profit in period 1

contract market
Prob D P
0.24 120000 63 100000 20000 $11,740,000
0.36 120000 84 100000 20000 $11,320,000
0.24 90000 84 100000 0 $8,500,000
0.16 90000 63 100000 0 $8,500,000

Node in Period 0

Profit in period 0
 from from spot Profit in period 0
contract market
D P
100000 50 100000 0 $10,000,000

Sell price
Expected profit in period 2 Expected Value in Period 1

$12,426,016 $22,095,013
$11,754,688 $21,115,573
$9,144,544 $16,120,453
$9,253,408 $16,211,173

Expected Value in period 1 Net Present Value (NPV)

Expected Value in period 1 Net Present Value (NPV)

$19,367,106.13 $26,139,255