Management and the Technology Professional – B302

Case study answer 3

As a Yahoo software engineer faced with the decision of starting or cancelling an advertising project prior to a possible takeover by Microsoft I would decide to go ahead with the project.

To make my decision I constructed a decision tree and calculated the net present value (NPV) of any revenue and expense that would be incurred by the decision to either start or cancel the project.

In order to construct a decision tree I had to estimate the likelihood of Microsoft successfully buying Yahoo and of the project failing or being completed. I estimated an 80% chance of Microsoft successfully acquiring Yahoo, this is based on the fact that Microsoft is a very wealthy company and have publicly announced their intention to purchase the company, which will put a lot of pressure and expectation on Yahoo. The sum of $45 billion offered by Microsoft is an extraordinary amount for what The Economist refers to as “an ailing internet giant”.
I have also estimated the probability of the project being a success as being 70%. Much of Yahoo’s business is in advertising contracts so the project succeeding should be assumed to be highly likely.

With these probabilities my decision tree gave the future value of starting the project to be £44.3K and the future value of cancelling the project to be -£18K. From these future values I then worked out the NPV for each path of my decision tree. To work out the present values I took the time cost of money (k) to be 2% for the four month period of the project.
The NPV of all the paths that extend from choosing to cancel the project are zero and below whereas only one possible path from starting the project has a negative NPV and the other two paths from starting the project, both of which are more probable, have much higher positive NPVs.

In conclusion I think it would be much more logical to start the project than to cancel it and miss out on the potential revenue.