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Consider the following pair of projects:
Project A has an initial start-up cost of $600,000,an annual staff
cost of $40,000,and an expected duration of 3 years;
Project B has an initial start-up cost of $100,000,an annual staff
cost of $80,000,and an expected duration of 5 years.
Both projects would produce the same finished product.
(a)In a simple parametric approach to cost estimation,the total cost
Y of a project taking X years can be expressed in terms of the annual
staff cost for the project a and its initial start-up cost b .
(i)Write down a formula expressing Y in terms of X ,a ,and b .[1mark
]
(ii)Using this simple parametric approach,what is the total cost of
each
project?[2 marks ]
(b)To choose between the two projects,we would require more information.Consider
each of the following statements,and explain carefully why and how
the information given might affect the choice between Project A and
Project B:
(i)In previous projects within the same company,the sta .costs have
been
underestimated by as much as 50%;projects ave also been known to overrun
schedules by as much as 50%.[4 marks ]
(ii)The customer will pay a fee on delivery of $500,000,plus a license
fee of
$250,000 a year for as long as they use the product.[4 marks ]
(iii)The company is able to obtain,through other means,a return on
investment of 15%:that is,the cost of $100,000 capital is $15,000
per year.[4 marks ]
No calculations are required:a simple explanation will suffice in
each case.
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