Homework Assignment #9

Due Friday 12 Noon, October 26, 2007

30 Points Total

The Megabit communications processing application has an estimated cost of $306K. Megabit Co. has identified $20K of up-front risk reduction money if we can show that it can be used for a favorable-leverage risk reduction activity. We have identified two alternatives:

a. Prototyping the Master Control Program (MCP). If the MCP doesn't work, the cost of developing the software will increase by 20%. The prototype will cost $20K to develop, and will reduce the probability that the MCP doesn't work from 0.20 to 0.05.

b. Adding a Fast Recovery capability, again at a cost of $20K. There is a probability of 0.4 that the hardware will fail over the system performance period. Without Fast Recovery, the loss from system downtime will be $100K. With Fast Recovery, the loss from system downtime will be $30K.

Calculate the Risk Reduction Leverage of each alternative and determine whether either alternative should be funded.

NOTE: the homework is due on Friday is because we need to distribute the solution to the homework on Saturday morning for Midterm II. So please make sure you turn in on time, late homework will NOT be accepted and submission is final.