Question

3. Suppose EMU Software is promoting its new tax preparation software. Its main competing

product is Turbotax’s software worth $50. EMU claims that for 30% of the time, its software

identifies additional savings of $110 for their customers compared to its closest competitor.

Also, EMU’s software is easier to use and it takes only 3 hours for its customer to use to

complete all its tax preparations. Turbotax’s software on the other hand takes 4 hours to do

the same. However, EMU Software is a new product and 5% of their customers may

experience a bug in the software. The delay in sorting that bug out will lead to an extra day

required for tax preparation using EMU Software for those customers. Assume that a typical

company accountant who would be hired to use the software earns $40 per hour. Calculate

the total economic value of EMU’s software. Note that one day is 8 working hours. (10

points)

Answer 1

Worth of Turbotax software = $ 50

Expected Value of additional savings identified by EMU = 110*30% = $ 33

Time taken by EMU software to complete tax preparations = 3 hours

Time taken by Turbotax software to complete tax preparations = 4 hours

Time saved by using EMU software over Turbotax software = 4 - 3 = 1 hour

Probability of bug in EMU software = 5%

Time taken in sorting the bug out using EMU software = 1 day

Cost of an accountant using software = $ 40 per hour

Working hours per day = 8 hours

Worth of time saved by EMU software = 1 hour * $ 40 = $ 40

Expected cost incurred due to bug in EMU software = 5%*1*8*40 = $ 16

Total economic value of EMU's software = Expected value of additional savings identified + Worth of time saved - Expected cost incurred due to bugs

= 33 + 40 - 16

= $ 57

[Comment: Economic value of Turbotax software is $ 50. So, economic value of EMU software is greater than that of Turbotax software]