Question 3
Currently, Harrington had just committed for a three months’ effort to the valve redesign effort and because of this limitation on time it could not guarantee the success of the project and therefore, she gave a 90% probability for the success of the valve redesign effort. However, if she would have given a 100% probability of the successful valve redesign effort then we can easily compute the total value which was being affected as a result of her reluctance. The total value which was being affected as a result of her reluctance was $ 29,500 under approach 1 and $ 30,000 under approach 2. The calculations could be seen in exhibit 3.
Question 4
The world renowned expert on software design Professor Calliope, has been contacted by Armstrong in order to provide perfect information regarding the short cut method of Gemini and whether it would work or not. Calliope has agreed to provide this information for a fee of $ 30,000. Therefore, in order to make a final decision of whether to hire Calliope or not we need to compute the value of this perfect information and then compare it with the $ 30,000 fee. First of all, the EMV of the project under the decisions of Calliope for new software development success and failure has been calculated and then using the probabilities of 25%/75%, the EMV of this project with perfect information has been computed which is $ 239,125 as shown in exhibit 4.
This has been then compared with the EMVs calculated through approach 1 and 2, which gives us the value of perfect information under both approaches. The fee of $ 30,000 has been then deducted from these values to calculate the likely benefit or loss from this perfect information. If Orion goes for approach 1, then it is recommended to hire Calliope since the EMV of PI is higher than the fee. However, if Orion goes for approach 2 then it is not recommended to hire Calliope since the EMV of PI is less than the fee of $ 30,000.
Orion Controls (A) Harvard Case Solution & Analysis
Appendices
Exhibit 1
Total Valves Order 50
OLD VALVE EMV
Probability
List Price 10000 100%
Variable manufacturing Costs 8000 100%
EMV 100000
SUPERSMART VALVE EMV
Development of New Software
Success Failure
75% 25%
120000 360000
EV -180000
Value Redesign
Success Failure
90% 10%
80000 80000
EV for cost -80000
Profit for failed effort 100000
Probability 10%
EV for failed effort 100000
Profit for successful effort (90%)
1. Dramatic Improvements (80%)
List Price 20000
Variable manufacturing Costs 10500
Profit 9500
2. Modest Improvements (20%)
List Price 12000
Variable manufacturing Costs 10500
Profit 1500
EV for Successful Effort 395000
EMV 105500
Exhibit 2
Total Valves Order 50
OLD VALVE EMV
Probability
List Price 10000 100%
Variable manufacturing Costs 8000 100%
EMV 100000
SUPERSMART VALVE EMV
Development of New Software
Success Failure
75% 25%
120000 100000
EV -65000
Value Redesign
Success Failure
90% 10%
80000 80000
EV for cost -80000
Profit for failed effort 100000
Probability 10%......................
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