Week 5 Homework #2 Decision Tree based on Schuyler’s approach. (Chapter 5.)
Description of Project:
An interesting situation came up within my organization; the service for an outsourced product we offer our customers was going to be discontinued. Being that we are in the software industry we had to consider our options for replacing the product. Our goal is to try to increase our revenue and customers therefore we had to choose from building a full internal solution or a partial solution where a third party is slightly involved to house data only. Any project we engage in will face elaboration cost (costs associated with our team members travelling and creating specs for the project). Elaboration cost at 6 months had a .35 probability of being completed and 12 months had a .65 chance of being completed. We analyzed the costs to build the project at 4 and 12 months intervals. At 4 months there is a 70% chance of being half done and a cost of $300k towards the engineering of the project. At 12 months there is a 30% chance engineering costs will be at $500k if completed. We analyzed the same thing if elaboration took a year and also gathered the same data for the partial build project. I will put all of the details gathered for the project in the table below. Based on Schuyler’s approach you should apply the expected value decision rule: Ev(1) is the minimum of the options, which in my case would be going with the partial build as costs would be lower. However, if we then factor in the profit from existing and new customers and weigh that again the amount we will pay to the 3rd party vendor over the course of 5 years to the option chosen would be building a Full version of the product.
Full Internal Build: |
Elaboration costs | Probability | Building Cost |
6 months | .35 | 70% @ 4 months – $300k30% @ 12 months–$500k |
12 months | .65 | 80% @ 4 months – $350k20% @ 12 months– $600k |
Partial Internal Build: |
Elaboration costs | Probability |...