Question

Hanna Frontier Software Solutions, Inc. (HFSI) has been investigating the possibility of developing a simulation software that can be used for analyzing risk and return from alternative lines of investment. The company is currently trying to decide between four proposed versions of the software: Simple (SS), Moderately Sophisticated (MSP), Sophisticated (SP), and Highly Sophisticated (HSP) versions of the software at respective development costs of $100,000, $200,000, $250,000, and $400,000.

• If the performance of the prototype developed by HFSI is better than existing software (a success), HFSI believes that it could sell the rights to its simulation software to a larger software developer for $250,000, $400,000, $650,000, and $880,000 for the SS, MSP,SP, and HSP versions, respectively.

• If the performance of the prototype developed by HFSI does not exceed the performance of the existing software (a failure), HFSI believes that it could still sell the rights to its simulation software to a larger software developer for $100,000, $130,000, $170,000, and $190,000 for the SS, MSP,SP, and HSP versions, respectively.

• HFSI estimates that the probability of a success for the software is 60%. However, the company also has the opportunity to hire a consultant who specializes in the study of markets for software. The consultant uses a market survey information to predict success or failure for software. In the past the consultant predicted a success for a prototype software in 85% of cases where the eventual product was a success. However, the consultant also predicted a success for the prototype in 25% of cases where the eventual product was a failure. The consultant’s fee for the service is $20,000.

1. What is the maximum amount HFSI should be willing to pay for a perfect forecast of success or failure for their software? Show the necessary steps. [2 points]
2. What is the maximum amount HFSI should be willing to pay for the consultant’s market survey information (EVSI)? On the basis of your findings, should the company hire the consultant? Show all the necessary steps. [7 points]

Answer 1

a). If the software is better than the existing software then we can get profit = $1280000.

If the software is not better than the previous software then loss = $360000.

If the forecast is perfesct then 5℅ level of significance then we can get 95% chance to get success.

So HFSI willing to provide 1% of the difference between profit and loss to perfect forcaster.

Because if the forecaster forcast perfectly then we can profits.

b).

i).previously HFSI was given $20000 to consultant.

Which he has forecasted 85% accurately.

ii).you are given to consultant less than 1% on final profit.

iii). If he did forecast good them HFSI can offer 1% to forecaster becuase based on the forecasting we can get prior information of performance of software.

iv ) no one can forecast 100% . Generally we take 95% accurate so forecaster predicts with 95% accurate its is good.

V). Company should hire the consultant because he knows the market performance.

Vi).if company hire the consultant then only it will know the market of their product.