December 1998
QT211: QUANTITATIVE ANALYSIS FOR MANAGEMENT

QUESTION 5

Total Marks: 20 Marks

• Question 1
• Question 2
• Question 3
• Question 4
• Cover Page
• Formulae Sheet 1
• Formulae Sheet 2
• Formulae Sheet 3

Click to access
SUGGESTED SOLUTIONS
for Question 5

• Plan A invoices using half of the current IT staff in a major internal effort
• Plan B involves using a combination of external contractors supervised by a much smaller number of the bank's IT staff.
• Plan C involves selling the prototype to an external company who have offered to pay $210,000 for all of the development rights, and the bank will then have no further involvement.

If the bank chooses either Plan A or Plan B it will develop the software itself. The bank has estimated that Plan A will cost $1 million and has probability of 0.4 of succeeding, and Plan B will cost $500,000 and has probability of 0.3 of succeeding.

If the development process is successful, then for either Plan A or Plan B the bank's marketing department has to decide whether to advertise the software aggressively or lightly. The software will then either obtain full or partial market acceptance.

• Aggressive advertising will cost $400,000 and gives a probability of 0.7 of full acceptance of the software
• Light advertising will cost $100,000 and gives a probability of 0.5 of full acceptance of the software.

Full market acceptance of the software marketed is worth $4 million for Plan A, and $3 million for Plan B. Partial market acceptance is worth $2 million for both Plan A and Plan B.