Hansons first task involve determining if the existing information system should

Question

Hansons first task involve determining if the existing information system should be upgraded or remain.two upgrade options whether to build the new infrastucture or buy new.The cost and impact is shown in the decision tree what decision should hanson recommend to Horizon investment bank?

This was all the information that was provided.

Successful Deplovment Build the new Impact: $4M Cost: $0.5M Unsuccessful Deployment Impact: $2M Successful Buy new infrastructure Stay, Buy, Build Cost: $0.75M Decision Deployment Stay with existing infrastructure 50 Unsuccessful Cost: S0M Deployment Impact: $2M Decline in Business

Explanation / Answer

The probability of first branch of decision tree is not given. Assuming that there is equal probability of occurance ( 50% each ) in each of the two options, the result will be

Expected value of Option to build the infrastructure = (0.5 x4+0.5x2) - 0.5 = 2.5

Expected value of option to purchase = (0.5x4.2+0.5x2)-0.75 = 2.35

The third option surely results in the decline in the business so it is not viable

As per the conditions, first option ( to build the infrastructure) is the most favorable.

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