Lesson 9 Questions
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California State University, Northridge *
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504
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Industrial Engineering
Date
Feb 20, 2024
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4
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Lesson 9 Questions Name: Sara Khan 1. Your company is trying to decide whether to develop a prototype for a new piece of equipment. Based on the information in the figure (decision tree) below, calculate the Expected Monetary Value (EMV) for the decision to prototype or not to prototype in the decision tree and determine which decision is cheaper based on the EMV. The initial investment for building a prototype is $300K; if a prototype is made there is a 35% probability of failure with a $250,000 impact to the project. If no prototype is made there is a 70% probability of failure with a $700,000 impact to the project. The figure below sets this up the same as in the PMBOK, Figure 11-15. For your convenience you can type your responses in the figure below, showing your work but you need to provide your final answers below in part a-c. Answer (show all work): a. EMV to Prototype: -387.5K (0.35(-550K) + 0.65(-300K)) b. EMV to NOT Prototype: -490K (0.7(-700K) + 0.3(0)) c. Which decision would you make (which is cheaper): Building the prototype would be cheaper because it has a Higher EMV. So, the decision would be to build the prototype. To Prototype a New Product or to Not Prototype New Product? Build New Prototype (invest $300K) Do Not Build Prototype (invest $0) Product Fails ($250K) Product Fails ($700K) Product Passes ($0) Product Passes ($0) 35% 65% 70% 30% = -250K - 300K
= -550K = 0 - 300K
= -300K = -
700K - 0
= -700K = 0-0 = 0K EMV to Prototype is
: -
387.5K 0.35(-550K) + 0.65(-300K)
EMV to not Prototype is
:
-490K 0.7(-700K) + 0.3(0)
Decision Node Chance Node End of Branch
2. Your company is trying to decide whether to proceed with a potential project. The project has a 60% chance of producing a $150,000 profit and a 40% chance of causing a $100,000 loss. Calculate the expected monetary value (EMV) for the project. Note the EMV of not doing the project is $0, you are only calculating the EMV for proceeding with this potential project. Answer (show all work): a) EMV for project is: 150,000(0.6) + (-100,000) (0.4) = $50,000
3. In the table below identify the type of risk response strategy for each example. Choose from the following categories: avoid, transfer, mitigate the probability, mitigate the impact, transfer, accept, exploit, enhance the probability, enhance the impact, share, or escalate. Complete the table: Item # Strategy example Type of risk response strategy 1 Notify the project management office (PMO) that if enterprise solution of the testing software needed for your project is purchased that 4 other IT groups could also use it for their current and upcoming projects. Mitigate the Impact 2 You have determined the potential costs associated with an identified risk but you have decided not to do anything to prevent the risk from happening. Mitigate The Probability 3 One of the members on your team is deficient in a certain skill that is needed for your project and you are concerned it could result in errors. You decide to send the team member for training. Enhance the Impact 4 Adjust the project schedule so that a particular work package aligns with the availability of a more experienced resource. Exploit
5 You decide to contract out a piece of your project to help you to take advantage of an opportunity. Share 6 You have decided to remove a person from your project that has been causing trouble. Avoid 7 You provide conflict resolution training for your project team. Enhance The Probability 8 You got word that your competitor is also interested in purchasing a key piece of equipment and you decide to start negotiations related to its purchase earlier than originally planned in hopes that you will get it for a lower price. Exploit 9 You hire an experienced contractor to complete a particularly difficult component of the project. Transfer 10 You ask your client to complete a portion of the work in which they have more expertise because you are concerned regarding negative impacts to the project if that portion is performed by your team. Accept 11 Remove an activity or a work package from the project scope due to some known issues with reliably producing the desired result. Avoid 12 Regularly visit your seller’s facility so that your team learns about potential problems with deliveries as soon as possible. Mitigate The Probability 13 You develop a prototype for the new product under development that is particularly risky. Exploit 4. Your project team will be developing a new mobile phone. You are required to calculate the contingency reserve that is needed for the project. Based on the project information in the table below, calculate the contingency reserve for each line item and then determine the overall contingency reserve cost to the project budget. Be sure to show your work for each calculation. Use the sign convention discussed in the Lesson:
negative outcomes have a negative EMV and positive outcomes would have a positive EMV. Be sure to include the sign for each line item below. A positive outcome is an opportunity and will have a positive sign
and a negative outcome is a threat and will have a negative sign
. In the last row you will add up the individual EMV values. If your final total is negative then this is the dollar amount that is needed in your contingency reserve. Project information Contingency reserve calculations (EMVs) and total
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a) You have determined that there is a 22% probability that the cost of some required parts will be $11,500 less than originally expected. 0.22(11,500) = $2,530 b) You have determined that there is a 30% probability that the same required parts will be delayed resulting in a $12,000 cost to the project. 0.3(-12,000) = -$3,600 c) Your simulation modeling has determined that there is a 20% probability that two of the parts will not fit together when they are assembled which will add an additional cost of $5,000. 0.2(-5,000) = -$1,000 d) There is also a 26% probability that the manufacturing process will be easier than initially planned which could result in a savings of $2,900. 0.26(2,900) = $754 e) You have also identified a 6% probability that a design defect will be detected which could result in rework costing $6,500. 0.06(-6,500) = -$390 Total cost of the contingency reserve: -$1,706 This is the amount that is needed in the contingency reserve