A company is faced with three choices when planning a new MIS system: to build the system from scratch; to re-use some modules developed for a similar system; or to buy and customise a commercial system.

a) Use the following probabilities and cost estimates to construct a decision tree model and find the expected cost of all three options.

There is a 60% probability that building the system from scratch will be difficult, costing 30,000 (50% more than an easy build). The other options both involve either small or large modifications. The risk of having to make large modifications is 50% for re-use but only 25% for buying-in. Re-use will cost at least 10,000, rising to 34,000 if large modifications are needed. The minimum cost of buying a commercial system is estimated at 15,000, with customisation estimated to cost between 4000 and 8,000 depending on how much work is involved.

b) Perform separate sensitivity analyses to determine:

What change in re-use costs would make re-use preferable to buying.

How likely the prospect of an easy build would have to be before building from scratch became as attractive as re-use.