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PayTech Solutions, a financial technology company, aims to enhance security by integrating a new AI-based Fraud Detection System (FDS) into their payment processing services. They

PayTech Solutions, a financial technology company, aims to enhance security by integrating a new AI-based Fraud Detection System (FDS) into their payment processing services.

They must decide whether to build a custom system tailored to their needs or purchase an off-the-shelf industry standard system used by competitors. A custom FDS would provide more value to PayTech, estimated at $2,000,000, but has uncertain development costs and might not work as planned. An industry standard system is worth $1,000,000. If they attempt to build a customized system and it does not succeed, the result would still be equivalent to the industry standard.

The company is faced with three options overall: develop the system in-house, outsource the development to a specialized vendor, or buy an off-the-shelf solution.

Develop In-House PayTech Solutions could leverage its internal resources and expertise to develop a custom AI-based FDS tailored to its specific needs and requirements, allowing for greater control over the systems features and capabilities. If developing in-house, there is a 0.6 probability of creating a custom system. Otherwise, they would end up with a standard system. Regardless of which type of system is produced, development cost is also uncertain with a 0.3 probability of $500,000 and a 0.7 probability of $800,000.

Outsource The company could contract the development of the AI-based FDS to an external vendor specializing in fraud detection solutions, potentially benefiting from the vendors specialized knowledge and experience but having less control over development. The vendor contract is a fixed $700,000 with no uncertainty. With less control over the final product, outsourcing only has a 0.5 probability of creating a custom system.

Buy Off-The-Shelf PayTech Solutions could opt for a pre-developed, standard AI-based FDS available in the market, which is less expensive and faster to implement but lacks customization. This solution costs $300,000 for the standard system.

I need to build a decision tree in Excel. Please help.

  1. What is the expected value of an in-house development?

2. What is the expected value of an outsourced development?

3. What is the expected value of buying the off-the-shelf system?

4. Which development approach should they choose?

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