Question

Softside Systems has a $100,000 fixed price contract for installation of a new application system. The project is expected to take 5 weeks and cost $50,000. Experience with similar projects suggests a 0.30 likelihood that the project will encounter problems that could delay it by as much as 3 weeks and increase the cost by $30,000. By increasing the project staff by 20 percent for an additional cost of $10,000, the likelihood of problems would be reduced to 0.20, and the delay and cost to 1 week and $8,000, respectively. Set up a decision tree to show whether Softside should increase the size of the project staff.

Answer 1

Therefore based on the decision tree, the value earned of the first option is greater than the second one. then there is no need to increase the staff.

Step-by-step explanation:

From the given question, we set up a decision tree to show whether Softside should increase the size of the project staff.

We will make use of 2 options

First Option

WE run the project with existing staff

The cost of project = 50,000

The cost of delayed project =50,000+ 30,000 = 80,000

0.3 (80,000) EV (delay) = 0.3 * 80,000 = 24,000

Contract

(100,000)

0.7 (50,000)EV (no delay) = 0.7 *50,000 =35,000

EV = The project fixed price - total cost

The total EV 100,000 - (24,000 + 35,000) = 59,000

For the option 2

Increase of staff

The cost of project = 50,000 + 10,000 =60,000

The cost of delayed project = 60,000 = 8,000 = 68,000

0.2 (68,000) EV (delay) = 0.2 * 68,000 = 13,600

Contract

(100,000)

0.8 (60,000) EV (delay) = 0.8 * 60,000 = 48,000

Then,

The total EV 100,000 - ( 13,600 + 48,000)

= 38,400

Therefore based on the decision tree, the value earned of the first option is greater than the second one. then there is no need to increase the staff.

Answer 2

Step-by-step explanation:

find the solution below