CYS103 Lesson 7 - Risk Analysis Assignment
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Jan 9, 2024
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Lesson 7 – Risk
Are you a risk seeker or are you risk averse?
1.
A project manager is sourcing equipment for a new IT project and must choose between two vendors: Odd IT and Even IT. To simplify the problem, the project manager decides to base the evaluation of the vendors’ proposals based on total cost of ownership (TCO) and product reliability.
Through research and talking to other project managers, the manager finds that Odd IT has a 60% chance of providing reliable equipment, and its parts cost $300,000 (including installation and maintenance costs). There is, however, a 40% chance that the equipment will fail – in which case, costs could increase to $850,000.
If Even IT is chosen, there is an 80% chance of high reliability at a cost of $750,000 and a 20% chance of failure. Even IT provides lifelong guarantees and maintenance services. a.
To which of the two vendors would you award the contract? Why?
Based on the given information, I chose Even IT, even though it has a higher upfront cost of $750,000. This decision is because Even IT has a lower chance of failure than the other options. Additionally, Even IT incorporates the cost of lifelong guarantee and maintenance services into the original price, so in the 20% chance that a failure does occur, the company will not be faced with additional charges. This makes Even IT a more reliable and cost-effective option in the long run.
2.
Use the formula below to calculate the risk associated with each of the two vendor proposals. Hint: the impact of the Odd IT proposal would be $550,000. Risk
=
Impact
∗
Probability
Cost
a.
What does the value calculated by this formula represent?
Based on the Return on Investment (ROI), the formula calculates the level of risk exposure.
b. Odd IT Risk:
The impact in the event of failure would be $550,000 (the difference between the potential costs of $850,000 and the original cost of $300,000). The probability of failure is 40%.
Risk = ($550,000 * 0.4) / $300,000
Risk = 0.7333 or 73.33%
c. Even IT Risk:
The impact in the event of failure would be the same as the original cost of $750,000. The probability of failure is 20%.
Risk = ($750,000 * 0.2) / $750,000
Risk = 0.2 or 20%
- Based on the results, the Odd IT proposal carries a higher risk than the Even IT proposal.
d.
Should the choice you made above change Why?
The final proposal choice would remain the same. Even IT would be the most reliable decision, despite the initial investment of $750,000 being comparatively higher. Even IT includes lifelong guarantee and maintenance services at the initial price, making it more dependable and cost-effective in the long term.
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