Management and the Technology Professional – B302
Case study answer 3
Overall I would defiantly start the project I have used decision tree and net present value techniques to help me make this decision.
The top route of my decision tree is most likely to occur due to having the highest probabilities and gives an NPV of £41,709. This will occur if the project is a success and Microsoft acquire Yahoo. I have estimated the probability of Yahoo having success with the project at 90% because they are well practiced in the field of advertising. It is something they do everyday therefore the chance of them succeeding with the project is very high. I have estimated the probability of Microsoft merging with Yahoo by using online sources. Not many mergers on this scale exist but I would think that there is quite a high probability of Microsoft acquiring Yahoo because they are not doing very well. Previously Yahoo turned down Microsoft’s offer because they were devolving new technologies to improve their chances in the market but this fell through. Therefore Yahoo are in a weaker position and the large amount of money Microsoft offered is also a good reason to accept their offer. I have estimated there is an 80% chance of the merger going through.
The 2nd path gives an NPV of £60,561 which is the highest NPV value but will only occur if Yahoo stays independent. This is less likely to occur because I have estimated a 20% of the merger not going through.
The 3rd path occurs when the project is started and fails this gives an NPV of £-24,271.84. I have assumed only a 10% chance of failure. The only reason the project is likely to fail would be due to some unforeseen circumstances.
The 4th path occurs when the project is cancelled and Microsoft merge with Yahoo. This gives an NPV of £0. There would be an 80% chance of this happening once the projects been cancelled. This shows that there would be no benefit of not doing the project.
The final path occurs when the project is cancelled and Yahoo stay independent. This gives an NPV of £-84,833. There would be a 20% chance of this happening after the project had been cancelled. There would be a negative benefit which is something you don’t want.
In calculating my present values I have used an interest rate of 9% in a year because this gives us a nice number when we divide it down into an interest rate for 4 months it becomes 3% therefore K =0.03. I am only really interested in risk and opportunity when choosing my value of K for this case.
Previous experience has taught me that if you are good at something and feel confident about your ability to complete the task then it is a good idea to take on the task. The analysis also suggests that starting the project is a good idea. When the pros of doing the project significantly outweigh the cons then you need to think about whether there is a good reason not to take on the project. In this specific case I can not see a good reason to cancel the project. This is because even if Microsoft does overtake Yahoo there is still a greater benefit available to the company than if the project isn’t started at all. If the project is not started then only a negative NPV/befit can be achieved which is not what you want. If you get a negative value for the benefit it is not worth starting the project in the first place as you have nothing to gain from. It I have considered other constraints on starting the project such as time, money, staffing issues but still come to the same conclusion because Yahoo is a large company. They do this kind of project all the time I feel that the most obvious conclusion to draw is starting the project.
