-The expected monetary value of conducting a joint design is ____ ( Enter your a
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Question
-The expected monetary value of conducting a joint design is ____ (Enter your answer as an integer.)
- What is the best decision based on an expected monetary value criterion?
Sox Engineering designs and constructs air conditioning and heating (HVAC) systems for hospitals and clinics. Currently the company's staff is overloaded with design work. There is a major design project due in 9 weeks. The penalty for completing the design late is $15,000 per week, since any delay will cause the facility to open later than anticipated, and cost the client significant revenue. If the company uses its inside engineers to complete the design, it will have to pay them overtime for all work. Sox has estimated that it will cost $10,000 per week (wages and overhead), including late weeks, to have company engineers complete the design. Sox is also considering having an outside engineering firm do the design. A bid of $82,000 has been received for the completed design. Yet another option for completing the design is to conduct a joint design by having a third engineering company complete all electromechanical components of the design at a cost of $54,000. Sox would then complete the rest of the design and control systems at an estimated cost of $30,000. Sox has estimated the following probabilities of completing the project within various time frames when using each of the three options. Those estimates are shown in the following table Probability of Completing the Design Option Internal Engineers External Engineers Joint Design On Time 0.4 0.2 0.2 One Week Late 0.4 0.3 0.4 Two Weeks Late 0.2 0.2 0.3 Three Weeks Late 0.3 The expected monetary value using inside engineers to complete the design is (Enter your response as an integer.)Explanation / Answer
The penalty of delay per week = $ 15,000
Using an external firm, there is a 30% probability of incurring a delay of 3 weeks = 3 * 15000 = $45,000
Bid value of external firm = $82,000
So total monetary value of project considering max. delay and external design firm = 82,000 + 45,000 = $1,27,000
Ans part 2)
For a Joint venture,
Maximum probability (40%) is for 1 week delay = $15,000 (This implies project is more likely to be completed earlier)
Bid value = $54,000
Completion cost = $ 30,000
So total estimated project cost = $54,000+30,000+15,000 = $99,000
So based on financial considerations and timely completion probabiliy, joint venture is a better decision.
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