Project Risk Management Page 10
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17EXERCISE: A company is trying to determine if prototyping is worthwhile on
the project. They have come up with the following consequences of whether
the equipment works or fails when it is used. Based on the information
provided below, what is the expected value of your decision?
Prototype:
Setup cost $200,000
Failure: 35% probability and
$120,000 impact
Pass: no impact
Failure: 70% probability and
$450,000 impact
Do Not Prototype:
Setup cost $0
Pass: no impact
Answer: if one just looks at the setup cost of prototyping is would seem like
an unwise decision to spend money on prototyping. However, the analysis
proves differently. Taking into account only one failure, the decision is that
it would be cheaper to do the prototyping. The answer is $242,000, or to
prototype.
Prototype
35% x $120,00 = $42,000 plus $200,000 = $242,000
Do not
70% x $450,000 = $315,000
prototype
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