A project manager has requested the risk manager's support in deciding whether to purchase a new component to expedite project execution. The component price is US$100,000 and there is a 30% chance…

Question

Options

• AThe new component should be purchased.
• BBoth options are losses to the project.
• CCost to expedite the execution is not worth the added risk.
• DPerform a Monte Carlo simul-ation to quantify the impacts.

• A
  86% (31)
• B
  3% (1)
• C
  8% (3)
• D
  3% (1)

Explanation

To determine whether to purchase the new component, we can perform an Expected Monetary Value (EMV) analysis for both scenarios: purchasing the component and not purchasing it. Purchasing the New Component: Probability of Success: 70% (0.7) Profit if Successful: US$500,000 EMV of Success: 0.7 * $500,000 = $350,000 Probability of Failure: 30% (0.3) Additional Cost if Failed: US$50,000 EMV of Failure: 0.3 * (-$50,000) = -$15,000 Cost of Component: -$100,000 Total EMV: $350,000 (success) - $15,000 (failure) - $100,000 (cost) = $235,000 Not Purchasing the New Component: Probability of Failure: 80% (0.8) Cost if Failed: US$250,000 EMV of Failure: 0.8 * (-$250,000) = -$200,000 Probability of Success: 20% (0.2) Profit if Successful: US$0 (assuming no additional profit without the component) EMV of Success: 0.2 * $0 = $0 Total EMV: $0 (success) - $200,000 (failure) = -$200,000 Comparing the two scenarios, purchasing the new component yields a positive EMV of $235,000, whereas not purchasing it results in a negative EMV of -$200,000. Therefore, from a risk management perspective, it is advisable to purchase the new component.

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