Softside Systems has a $100,000 fixed price contract for installation of a new application system. The project is expected to take 5 weeks and cost $50,000. Experience with similar projects suggests a 0.30 likelihood that the project will encounter problems that could delay it by as much as 3 weeks and increase the cost by $30,000. By increasing the project staff by 20 percent for an additional cost of $10,000, the likelihood of problems would be reduced to 0.20, and the delay and cost to 1 week and $8,000, respectively. Set up a decision tree to show whether Softside should increase the size of the project staff.

Therefore based on the decision tree, the value earned of the first option is greater than the second one. then there is no need to increase the staff.

Explanation:

From the given question, we set up a decision tree to show whether Softside should increase the size of the project staff.

We will make use of 2 options

First Option

WE run the project with existing staff

The cost of project = 50,000

The cost of delayed project =50,000+ 30,000 = 80,000

0.3 (80,000) EV (delay) = 0.3 * 80,000 = 24,000

Contract

(100,000)

0.7 (50,000)EV (no delay) = 0.7 *50,000 =35,000

EV = The project fixed price - total cost

The total EV 100,000 - (24,000 + 35,000) = 59,000

For the option 2

Increase of staff

The cost of project = 50,000 + 10,000 =60,000

The cost of delayed project = 60,000 = 8,000 = 68,000

0.2 (68,000) EV (delay) = 0.2 * 68,000 = 13,600

Contract

(100,000)

0.8 (60,000) EV (delay) = 0.8 * 60,000 = 48,000

Then,

The total EV 100,000 - ( 13,600 + 48,000)

= 38,400

Therefore based on the decision tree, the value earned of the first option is greater than the second one. then there is no need to increase the staff.