Decision with Dependent Conditions Alternative ID
Decision with Dependent Conditions
|
Alternative ID |
Description |
Probability Sponsor Exercises Option
|
Probability of Sponsor Decision, SD, Late |
Probability of 20-Day Schedule Delay
|
Face Value of Delay, D,
@ $10,000 per Day |
EV of Delay, D (p of SD * p of Delay * $Face Value) |
EV of Acquisition Cost (p of Option * $Face
Value * D) |
Expected Value of Alternative
|
|
A |
MAKE |
|
0.3 Late
0.3 Late |
0.67 Yes
0.33 No |
$200,000 Yes
$0 No |
$40,200 $0 |
|
= 0.75 * ($40,200 |
| |
|
0.75 Yes |
|
|
|
|
= $125,000 * 0.75 |
+ $84,000) + $93,750 |
|
A |
MAKE |
|
0.7 On time
0.7 On time |
0.6 Yes
0.3 No |
$200,000 Yes
$0 No |
$84,000 $0 |
= $93,750 |
= $186,900 |
|
A |
MAKE |
0.25 No
0.25 No |
|
0.6 Yes
0.4 No |
$200,000 Yes
$0 No |
$0 |
$0 |
$0 |
|
B |
BUY |
|
0.3 Late
0.3 Late |
0.23 Yes
0.77 No |
$200,000 Yes
$0 No |
$13,800
$0 |
|
= 0.75 * ($13,800 |
| |
|
0.75 Yes |
|
|
|
|
= $200,000 * 0.75 |
+ $28,000) + $150,000 |
|
B |
BUY |
|
0.7 On time
0.7 On time |
0.2 Yes
0.8 No |
$200,000 Yes
$0 No |
$28,000 $0 |
= $150,000 |
= $181,350 |
|
B |
BUY |
0.25 No
0.25 No |
|
0.2 Yes
0.8 No |
$200,000 Yes
$0 No |
$0 |
$0 |
$0 |
Note further that the decision to make or buy is not changed by
the effect of a late decision of the sponsor. "Buy" comes out more advantageous
in the face of a dependent condition with the sponsor's decision. The upside and
downside of a decision in favor of "Buy" are:
Upside of an on-time sponsor's decision is the "Buy" acquisition
cost = $200,000
Downside of late sponsor's decision = $181,350 - ($200,000 +
$200,000) = -$218,650
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