Question

ABC Co. is considering its options for managing its IT infrastructure. The cost of each alternative depends on demand for services, a function of the company's growth. The annual cost of each option (in thousands of dollars) is included in the table above.

a)   If demand probabilities are .4, .4, and .2 for high, medium, and low demand, respectively, which alternative will minimize the expected cost of IT?

b)   Assuming you choose the option with the lowest expected cost, what conditions must be in place to justify this decision?

c)   What is the expected value of perfect information (EVPI) in this scenario?

d)   BONUS: what probabilities would cause you to be indifferent between using your own staff and choosing an outside vendor?

	Demand
Staffing Options	High	Medium	Low
Own Staff	650	650	600
Outside Vendor	1000	600	200
Combination	800	650	500

Answer 1

Answer a=

Demand Staffing Options High Medium Low 650 650 600 600 200 Own Staff Outside Vendor Combination Probability 1000 800 650 500 0.2 0.4 0.4 EMV Demand Staffing Options High Medium Low 650 650 6001 Own Staff Outside Vendor Combination Probability 1000 800 600 650*0.4+650*0.4+600*0.2 200 1000*0.4+600*0.4+200*0.2 500 800*0.4+650*0.4+500*0.2 0.2 650 0.4 0.4 EMV Demand Staffing Options High Medium Low 650 600 640 650 600 1000 200 680 Own Staff Outside Vendor Combination Probability 800 650 500 680 0.4 0.4 0.2

As the best EMV is of own staff so the option os own staff should be selected.

Answer B= In order to select the option with least cost, it is important that the EMV of the total demand shoudl be least

Answer C- EVwPI=0.4*1000+0.4*650+0.2*600 =780

EVwoPI =680

EVPI= EVwPI -EVwoPI =780-680=100