As you are aware, there is a decision that needs to be made about how the company should execute the CARV software development project for the next ten months. There are three options available at the immediate time: continue with only the software development, begin an expansion of the hardware systems immediately, or delay the hardware expansion to see where the software development is in five months. In order to make a decision that fits the company’s business needs, each of the three options have been evaluated to calculate which option would cost the company the least amount of money, and then calculated a second time to decide which option would cost the least in both monetary value ...view middle of the document...
The expected cost of each decision, shown in Appendix 1, is as follows: software only costs $3.32 million, hardware now costs $3.5 million, and delaying hardware will cost $3.2906 million.
Decision for Minimizing Expected Cost (Excluding Reputation Loss)
The overall worst case scenario for the company is a loss of $4.6 million; the best case scenario is a loss of only $3.0 million. However, to accommodate for the 13 possible outcomes, and the risk associated with each outcome, the company must take into consideration the expected monetary loss. Since the company’s decision is to choose the path to minimize expected loss, the best route to choose is to delay the hardware expansion for five months. The Appendix 2 Decision Tree depicts the path the company should consider after the delay. In five months, if the completing the software development on time seems favorable, or there is no change in information, then the company should not expand the hardware. If the likelihood that the software will be completed on time is unfavorable, then expanding the hardware is the safest route to take.
How Loss of Reputation Affects Overall Decision
In the decision made above, the cost of the company losing its reputation was not taken into account. However, anytime a deadline is missed, it is assumed that the company will lose some of its reputation. In the scenarios listed on Appendix 3 and Appendix 4, there are four purple lines shown; these are the scenarios that could potentially cost the company its reputation. The difficulty in calculating reputation is that reputation is normally viewed as an intangible asset, and therefore does not hold an exact monetary value.
Analysis for Minimizing Total Expected Cost
If you remember in Appendix 1 and Appendix 2, decisions were made by finding the expected monetary value, and when a decision point came (depicted as boxes), the lowest cost was chosen. This same approach was taken when including the cost of a lost reputation, however, since the true cost is an unknown variable, ‘x’ was used in its spot. This process produces an equation that can be plotted and compared with the other options. Using these equations allowed us to analyze the sensitivity of the reputation cost on the total cost of each option.
In order to decide which choice was best when comparing to expand or not expand on Appendix 4, it was assumed that the cost of reputation is $1.0 million, as mentioned in the case study. For the next example, please reference Appendix 4. The decision to expand or not expand if favorable progress has been made after five months comes to two different...