1. You are trying to decide whether to approve a development budget for a new ERP system. If you are not convinced, you could always skip out on deployment, with no net costs or gains. You could definitely be more aggressive. Here are two options. You could choose System A, which would result in additional sales of either $50,000 under good conditions or $10,000 under bad conditions. You could also choose System B, which would increase sales by $36,000 whether the market condition is good or bad. Assume that good conditions are three times as likely as bad conditions. Which option should you pursue if an ERP system costs $35,000?

2. WZ Inc. is an event planning and promotion company who organizes events of different sizes for their clients. Planning and managing events have more than their fair share of frustrations and stressors. From last-minute changes to procrastinating clients, the profession isn't for the faint of heart. Luckily, executing a successful event makes everything else (like the crazy long hours) worth it. There is a major event planning project due in 8 weeks. The penalty for planning the event late is $14 000 per week, since any delay will cause the venue to open later than anticipated, and cost the client significant returns. If the company uses its inside event planner to complete the planning, it will have to pay them overtime for all work. WZ Inc. has estimated that it will cost $12 000 per week (wages and overhead), including late weeks, to have the event planners finish the job. WZ is also considering outsourcing the planning work to other event planning companies. A bid of $92 000 has been received for the completed event plan. Yet another option for completing the job is to conduct a joint planning by having a third party complet all the preliminary work at a cost of $56 000. WZ would then complete the rest of the planning at an estimated cost of $30 000.

WZ 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 planning

Alternatives

On Time

1 Week Late

2 Week Late

3 Week Late

Internal Planner

.4

.5

.1

-

Outsourcing

.2

.4

.3

.1

Joint Work

.1

.3

.4

.2

What is the best decision based on an expected monetary value criterion?

3. Montreal Hardware Co. is making a make-or-buy decision. The market feedback shows that the optimal price for this item is $10 each. If the item is outsourced to Laval Hardware Co, there is virtually no cost other than the $6 per unit that they would pay Laval Hardware Co. Internally, they have two choices. Process A requires an investment of $120,000 for design and equipment, but it results in a $4 per unit cost. Process B requires only a $100,000 investment, but its per unit cost is $5. Regardless of whether the item is subcontracted or produced internally, there is a 50% chance that they will sell 50,000 units, and a 50% chance that they will sell 100,000 units. Draw the decision tree appropriate to the alternatives and outcomes stated. Using the decision tree and EMV, what is their best choice?