If we want to compare both the previous approaches in terms of the probability or the chances of developing a new dramatically improved valve, then it could be said that approach 1 in question 1 has greater chances of developing a new dramatically improved valve. This is because in the first approach Armstrong would not consider the importance of the economic consequences and he would continue with the software development with an additional cost of $ 240,000 if the short cut method fails. However, the probability of failure of the short cut method is 25% which is not significant. Also the probability of dramatic improvements in the valve is 80% which is quite significant. Therefore, the chances of developing a new dramatically improved valve are much higher under approach 1.
Apart from this, if the objective of Armstrong is to achieve favorable short term financial performance then he needs to give importance to the economic consequences and adopt approach 2. However, if his objective is long term to enhance customer satisfaction, market development and improve the performance of the company in terms of product reliability, leading edge technology, willingness to design customized products and enhance customer relations, then he needs to adopt approach 1 and go ahead with the design of the improved supersmart valve.
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.
Running Head Orion Controls (A) Harvard Case Solution & Analysis
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.
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