Investigate The Purchase Of Lithium From An African Company
Investigate the purchase of lithium from an African company for $100 per barrel
You are a buyer for a battery company and are investigating the purchase of lithium from an African company for $100 per barrel. The purchase involves an additional $14 per barrel for processing and packaging before shipping. The source requires a 15-month lead time with payment for material and packaging upfront at the time of order. Transportation costs are $4 per barrel, paid upon receipt. If the risk-free annual interest rate is 10%, calculate the value per barrel after it is received in the U.S. If the delivery is 3 months late, determine how much is invested per barrel when it is received, assuming monthly compounding.
Paper For Above instruction
The decision to purchase and process lithium in international markets involves various financial considerations, especially when accounting for lead times, costs, and interest rates. This analysis evaluates the net present value (NPV) of the transaction, considering the specified lead time, costs, and timing of payment, along with potential delays.
Calculating the value per barrel after receipt
Initially, the total cost per barrel comprises the purchase price, processing and packaging costs, and transportation. The purchase price is $100, and the processing and packaging costs are $14, summing to $114. Adding transportation costs of $4, the total cost at receipt becomes $118 per barrel. Because the lead time is 15 months, the payment for these costs occurs upfront at the time of order, and the cost accrues interest over this period.
Given an annual risk-free rate of 10% with monthly compounding, the per-month interest rate is (1 + 0.10)^(1/12) - 1 ≈ 0.007974. Over 15 months, the growth factor is (1 + 0.007974)^15 ≈ 1.1275. Therefore, the future value of the initial $118, considering the lead time, is $118 × 1.1275 ≈ $133.085.
To evaluate the value per barrel upon receipt in the U.S., the present value (PV) of this amount is calculated by discounting back from receipt date to the present. Since the payment is made upfront and the cost is projected forward, the value received is approximately $118, which is the initial outlay—adjusted for interest costs over the lead time.
Impact of a 3-month delay on investment
If the delivery is delayed by 3 months beyond the original 15 months, making it 18 months total, the interest calculation adjusts accordingly. The growth factor over 18 months is (1 + 0.007974)^18 ≈ 1.1498. Thus, the value to be invested per barrel at receipt when delivery is late becomes $118 × 1.1498 ≈ $135.75.
This implies that the company must have invested approximately $135.75 per barrel at the time of receipt if delivery is delayed by 3 months, considering monthly compounding and the given interest rate.
Financial implications for procurement decisions
These calculations exemplify the importance of lead times and delays in international procurement amid fluctuating interest rates. A delay of three months increases the effective cost of procurement due to interest accrual, impacting the overall profitability of the project. Companies must incorporate such delay costs into their strategic planning to ensure accurate cost estimations and profitability analysis.
Conclusion
Based on the calculations, the value per barrel after receipt in the US, considering a 15-month lead time with a 10% annual interest rate compounded monthly, is approximately $118, and the invested amount if delivery is delayed by three months rises to about $135.75 per barrel. These insights aid procurement strategies by quantifying the financial impact of lead times and potential delays in international supply chain management.
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