Management and the Technology Professional – B302

Case study answer 3

As the software engineer, I would start this project based on careful consideration of my options using the decision tree, Expected Value and the Net Present Value (NPV) technique. For a correct calculation, the following deductions were made
Personal Deductions
My investigations showed during to Microsoft Corporation's bid that we were valued at $31 billion and Microsoft was willing to pay $44.6 billion. Considering the financial challenge we have had, especially the failure of Panama leading to the resignation of our Chief executive, Terry Semel in June 2007 and the fall in our share price to a four - year - low (as of January 30th 2008); I also took the liberty to check share price yesterday, Its amazing to know that the news of Microsoft Corporation's willingness to acquire our organization has cause a sporadic increase in our share prise in the past one month owing to the high possibility of this acquisition. I would therefore deduce that the chances that the deal will go through would be about 60% (Probability that it will not go through is calculated therefore as 40%).

Considering the odds against us (Yahoo Inc.), as far as the success or the failure of the project is concerned, I can deduce that the chances that the project will fail is slim, possibly 30% at the maximum. Such odds include resignation of key members of our experienced staffs as a result of the merger/acquisition, sudden death or sickness of staffs and other unforeseen circumstances.

However, my 5 years experience as a software engineer in this organization and have taught me that for any unexpected challenge, there are a couple of work - arounds to ensure to resolve it. Apart from the fact that this project is one in which we thrive at here in Yahoo Inc., the success of this project will not only be of benefit to our organization but also to the World leading monopolist in Operating system software(Microsoft Corporation). Hence it can be inferred that support to put resources together in order to ensure the success of this project will come from all levels in the organization, including the management. This therefore also affirms my deduction on the probability of a failure as 30% (success could be calculated as 70%).

The value of my discount rate was estimated as 6% based on the interest rate of 5.5% from the Bank of England as of January 10 2008, stock price information of both Microsoft Corporation and Yahoo Inc and the financial risk associated with acquisition process.

Calculations;
For Expected Value:
Given that: Expected Value = Probability x Value
Value, V 1 ( Microsoft acquires Yahoo Inc. and the project succeeds ) = V a + V b + V c, = $( 90,000 - 20,000 - 25,000 ) = $ 45,000
Value, V 2 ( Yahoo Inc. stays independent and project succeeds ) = V a + V c, = $( 90,000 - 25,000 ) = $65,000
Value, V 3 ( Project fails ) = V c = $25,000
Value, V 4 ( Project canceled and Microsoft acquires Yahoo Inc.) = $0
Value, V5 ( Project canceled and Yahoo stays independent ) = V a = $90,000
For Net Present Value, NPV:
Giving that : Future value = Present value x Time cost of money
Present value, PV = Future Value / Time cost of money, = Future Value / ( 1 + K )^N
where discount rate, K = 6% per annum, therefore for 4 months, K = 6x4/12 = 2% = 0.02
For the first path, Microsoft acquires Yahoo Inc. and the project succeeds,
Therefore, NPV 1 for the first path = PV a + PV b + PV c, = $86,505.2 - $19,223.4 - $24,029.2 = $43,252.6.
For the second path, Yahoo Inc. stays independent and project succeeds,
Therefore , NPV 2 for the second path = PV d + PV e, = $86,505.2 - $24,029.2 = $62,476.
For the third path, Project fails,

Comparing the above three Net Present Value options and the above two Expected Values under the company's current circumstance, I will therefore make the decision of starting the client project.