In the context of software development projects, a program manager was faced wit
ID: 2722475 • Letter: I
Question
In the context of software development projects, a program manager was faced with the following choice last year: He had to option of going with a vendor who proposed a bid which was partly based on future integration costs that were beyond their control. Analysis suggested that total final cost for the program would come somewhere between 100K and 250K, based on the program managers past-experiences. He commissioned an internal study to determine whether an in-house development effort (which would not be subject to any uncertainty due to integration) would cost more than 165K, thinking that he would take his chances with the vendor if the in-house work would cost more than 165K. 1.Determine the managers risk tolerance based on the above information. Currently, the same manager is facing a hardware purchase decision, which is again subject to uncertainties because final hardware requirements are subject to future outcomes of external influences beyond his control. As the company has no in-house capability to build hardware, he solicited and received three bids, with the following possible cost outcomes: Bid Optimistic Cost (p=.05) Most likely cost (p=.5) Pessimistic cost (p=.95) A 95 125 175 B 100 110 190 C 75 150 180 2.Based on the managers risk tolerance you calculated in (1), determine which bid should he accept. Please explain calculations in detail.
Explanation / Answer
The best & worst case scenario for the Project Manager is 100k & 250k respectively.
Therefore he has a range of 150k ( 250-100) to decide whether to go inhouse or take chances with vendor.
His threshold for the purpose is 165k which 65k more than the lower limit.
So his risk zone is 150k-65k = 85k
So risk tolerance of manager is =( 85/150)*100 which is 56.67%. So his risk tolerance level is moderate.
2.
For Optimistic cost - lowest bid is C with 75
For Most likely cost-lowest bid is B with 110.
For Pessimistic cost - lowest bid is A with 175.
Considering the risk tolerance level of the Manager he will go for Bid B with Most Lokely Risk i.e, 110