Management and the Technology Professional – B302

Case study answer 3

As one of the software engineers of the small business department here at Yahoo it is vital that any proposed project is correctly assessed to ensure that we can make the most educated decision possible when accepting a new project. With the possibility of a merge with Microsoft in the not too distant future added costs may be incurred and extra problems may be encountered during this busy commercial time. Taking this into account a decision must be reached whether to accept the current job offer or not and what effect the merge would have on the financial outcome of the chosen decision. In order to make a well educated, quantitative prediction a decision tree was drawn up comparing the possible options that are available to us to asses all possible risks to aid in the final decision.

The first stage is assessing the probability of completing the project if accepted. The job in question is the type of thing that is dealt with everyday here at Yahoo in the small business advertising section, and is what myself and the rest of the team specialise in. With this in mind and presuming that the project has no unknown extravagant extras required I would predict a 90% probability of success in completing the job if accepted. If the job is accepted and completed and the merge does not go ahead then the total future revenue for the company will be £65,000, £25,000 up front costs followed by a payment of £90,000 for successful completion. However taking into consideration the possible merge, if we are acquired by Microsoft then the job would only return £45,000 due to an expected extra fee of £20,000 to change contracts. These are however all projected future values.

After reading recent news it looks unlikely that the merger will go ahead, however due to the nature of the decision i.e. huge possible revenues and benefits for both parties, it cannot be ruled out completely so a probability of 20% for the merger to go ahead will be used in the NPV calculation to assess the risk involved with the proposed job.

From drawing the basic tree and adding in the future values it was clear to see that there would only really be two viable options to take, and that is to accept the project and work out the associated risks on whether the merger will or will not go ahead. Not excepting the project would have meant that if the merger did not go through it would be considered a loss to the company and if it did then there would have been no financial loss or gain considered.

Through calculating the present values along the branches of the tree it was then possible to calculate the NPV for both the project to be accepted and the merge going ahead and for it not. The returned values were £75518 and £103440 respectively. These were calculated using a K value of 0.54% obtained from the current HSBC annual interest rate of 5.5% which was then divided by 3 to equate to a 4 month period.

Through using this technique of risk assessment I would most certainly go ahead with the acquisition of the proposed project. With the combination of the probability and calculated present values whether the merge does or does not go ahead the financial reward will be substantial once the job is successfully completed.