Management and the Technology Professional – B302
Case study answer 3
In this case study there are a number of outcomes for the project. Each outcome consists of varying degrees of payout (revenue) using decision tree analysis I have been able to calculate the probability associated with each option and from that information decide weather to start the project or cancel the project.
I have calculated that starting the project would be worth £60,500 and not starting the project would mean an -£18,000 loss. From the figures calculated it would be worth my while in starting the project to make money for the company.
The calculations involved the following parameters:
• Probability Microsoft takes over yahoo = .8 (I have chosen this probability because, there is a very high chance that this action will go through, owing to the fact that Microsoft is a company that can afford this transaction, has market knowledge in this area and Microsoft have a keen interest in this company)
• Probability Microsoft fails to take over yahoo = .2 (this is due to recent events were yahoo rejected an initial buy out from Microsoft)
• Probability of project completing successfully = .9 (there is a very high chance of the project completing successfully, this will be undertaken by a team who do these projects day in and day out.)
• Probability of not completing project successfully = 0.1 (to make summation equal to 1)
• In calculating the future value
o ‘k’ was set to 2.3% - 0.023 (researching banks I found that an average figure of 7% APR was used for loans, as the project is only 4 months I needed to divide this by 3 to get the correct amount.)
o ‘n’ was set to 2 (there are two times when transactions take place, the initial setup costs and the end payment.)
the figures are available below:
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