A software company has just won a contract worth ¢80 million if it delivers a successful product on time but only ¢40 million if it is late. It faces the problem now of whether to produce the work in-house or to subcontract.

To subcontract the work would cost ¢50 million but the local subcontractor is so fast and reliable as to make it certain that successful software is produced on time. If the work is produced in-house the cost would be only ¢20 million but based on past experience, would have only a 90% chance of being successful. In the event of the software not being successful, there would be insufficient time to rewrite the whole package internally but there would still be the option of either a late rejection of the contract at a further cost of ¢10 million or a late sub-contracting of the work on the same term as before. With this late start, the local subcontractor is estimated to have a 50/50 chance of producing it late. In this case, the subcontractor still has to be paid ¢50 million regardless of whether he meets the deadline or not.

Required
Recommend the best course of action of the software company using the tree diagram approach.

Answer rating: 100% (QA)

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