Question

Question 7

Department of Procurement in Kuvuku Land has to decide which of the four bidding companies is to be awarded the correctional services' IT upgrade tender. The directors believe that the tender will assist the correctional services centres with updating and expanding the centers' IT capacities in line with modern innovations like electronic fingerprinting, electronic monitoring for parolees, and even to allow centers to use IT to let victims know more about parole hearings.

The tender will be awarded to the bidding company that meets the price requirement and not the functionality as well as administrative requirements as previously done. However
the directors agreed that the functionality and the administrative requirements will be considered when there are parties, during the evaluation phase, that might raise concerns
relating to these requirements.

There is a 40% chance that the bidder will reasonably comply with some Sections of the Constitution of Kuvuku Land, a 10% chance the bidder will comply fully with some Sections of the Constitution of Kuvuku Land and a 50% chance that the bidder will not comply with some Sections of the Constitution of Kuvuku Land.

The company uses expected value to make this type of decision

The department provided the following information:

Bidder's law compliance	Company A	Company B	Company C	Company D
	R'000	R'000	R'000	R'000
Reasonably comply	5000	4800	5500	6000
Comply fully	4600	4700	3500	3000
Not comply	4300	4600	4000	5000

Zindlo Limited, market research company, believes it can provide perfect information on how much the actual cost could be the IT infrastructure typically required for projects like
this IT upgrade tender.

Required:

Calculate the maximum amount that should be paid for the information from Zindlo Limited
(8 marks)

Answer 1

The expected value in case of making an investment is the value that is anticipated for an investment . The expected value is calculated by multiplying the probability of each possible outcome and the possible outcomes ( the investment that needs to be made in this case). We get the desired results by adding up all the values and then the choice can be made regarding the selection of the opportunity .
Calculation of Expected values of decision
Sr No	Bidder's law compliance	Probability	Company A	Company B	Company C	Company D
a	Reasonably comply	0.4	5,000	4,800	5,500	6,000
b	Expected value ( a x Probability )		2,000	1,920	2,200	2,400
c	Fully comply	0.1	4,600	4,700	3,500	3,000
d	Expected value ( a x Probability )		460	470	350	300
e	Not comply	0.5	4,300	4,600	4,000	5,000
f	Expected value ( a x Probability )		2,150	2,300	2,000	2,500
g	TOTAL EXPECTED VALUE
	( b+d+f)		4,610	4,690	4,550	5,200
	The lowest expected value of the bid is from Company C - R 4,550.(In 000) Generally the bidder with the lowest amount is alloted the bid. So Company C has the highest chances of getting the tender in its favour owing to the lowest price, as the company is focussing on price requirement. Zindlo is ready to provide the perfect price that is typically required for such projects . So the price that would be finalised for the project will be the lowest between the price by Company C and the price that is provided by Zindlo through its research.