project bs

7/25/2019 project BS

1/6

Risk Management Assignment

Group 6

0308/52 RAJDEEP MURMU

0313/52RAMGOPAL VARMA BALARAJU

SAI

0338/52SAI SHIVA RAMA KRISHNA

SIRIMALLA

0345/52 SANDEEP KUMAR PAL

0357/52 SAURABH BHITKAR

0363/52 SHAH DHWANIL RAJENDRA


2/6

Introduction

Focus Software, the makers of the Focus ABC software have sued Discount software regarding theirproduct VIP Scheduler which has the same menu interface & functionality while being retailed at a

fraction of the cost of Focus ABC. However Discount software did not have high market share which

prompted Sam Ellis, the CEO of Forward Software, that this was a ploy to intimidate them. Forward

Software sells Cinco, the critically acclaimed spreadsheet software, which is compatible with Focus

ABC and improves upon it. It implements a new menu system but also supports Focus ABCs \ menu

and was gaining market share rapidly. There is a strong chance that Focus Software might sue

forward software next.

Problem statement

Based on the problem, Sam Elis has the following options

1. Settle outside the court before the judgment of Focus vs Discount software case. The

probabilities of settling the case $5, $8, and $12 million are 0.5, 0.3, and 0.2 respectively.

Also the settling process would cause $1 million in attorneys fees.

2. Wait the trial to end. The probability of Focus Software winning against Discount is 0.4. If

Focus software wins against Discount Software, the probability of Focus Software suing

Forward Software is .9. If Forward Software is sued, It has two options

a) Settle the case outside the court. The settlement amounts might be $8, $11, $15

million with the probabilities 0.3, 0.4, 0.3 respectively in addition to attorneys $1.2

million fees.

b)

Pursue trial with winning probabilities of 0.2, otherwise lose and pay damages to a

sum of $8, $16, $18 million with probabilities 0.1, 0.3, 0.6 respectively in addition to

attorneys fees of $2.5 million.

3. There is an option of a study by law firm which charges $.7 million to conduct a research to

determine the probability of the Focus winning or losing in the case against Discount. Law

firms study results are 90% accurate.

Recommendations

1.

Sam should wait for the result of case between Discount and Focus. If Focus wins, thenForward should go for out of court settlement.

2. Option of study by the law firm is not at all cost effective. If it were $0.56 million or less.

Then it would have been of some worth.


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Sensitivity of the value of information with respect to accuracy

It can be seen from the above, that at 100% accuracy, the optimal cost, i.e the expected loss to

Forward has gone down to -4.138 million dollars. Thus at this juncture, the value of information is

~1.06 million dollars (4.5-4.138+.7). Optimal cost is study dependent after the study is more that

92% accurate.

Sensitivity of Expected loss to Forward w.r.t. Cost of Study

-4.5

-4.45

-4.4

-4.35

-4.3

-4.25

-4.2

-4.15

-4.1

0.9 0.92 0.94 0.96 0.98 1

OptimalCost

Accuracy

SensIt 1.51 Trial Version, Only For Evaluation,

www.TreePlan.com

-4.5

-4.49

-4.48

-4.47

-4.46-4.45

-4.44

-4.43

-0.7 -0.65 -0.6 -0.55 -0.5

ExpectedLoss

Cost of Study


www.TreePlan.com

Accuracy Optimal Cost0.9 -4.5

0.91 -4.5

0.92 -4.5

0.93 -4.4866

0.94 -4.4368

0.95 -4.387

0.96 -4.3372

0.97 -4.2874

0.98 -4.2376

0.99 -4.1878

1 -4.138

Cost of

Study Expected Loss

-0.7 -4.5

-0.68 -4.5

-0.66 -4.5

-0.64 -4.5-0.62 -4.5

-0.6 -4.5

-0.58 -4.5

-0.56 -4.496

-0.54 -4.476

-0.52 -4.456

-0.5 -4.436


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Thus, the expected loss reduces once the cost of study goes less than .56 million dollars. Hence at

90% accuracy for the study to be helpful to Forward, it has to be less than .56 million dollars.

Sensitivity Analysis of Optimal Cost w.r.t. to various parameters

As the probability of Forward winning the trial increases, the optimal cost starts decreasing. The

trend is apparent after probability of Forward winning the trial is 0 .4.

As the probability of Focus beating Discount goes up, the chance of it winning against Forward also

go up. Hence the expected loss to Forward is at -8.3 million, which is cost to settle out of court

before the trial between Focus and Discount ends.

-4.5

-4

-3.5

-3

-2.5

-2

-1.5

-1

-0.5

0 0.2 0.4 0.6 0.8 1

Op

timalCost

P(forward wins the trial)


www.TreePlan.com

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

0 0.2 0.4 0.6 0.8 1

OptimalCost

Probability focus beats discount

SensIt 1.51 Trial Version, Only For

Evaluation, www.TreePlan.com

P(forward wins the trial) Optimal Cost

0 -4.5

0.1 -4.5

0.2 -4.5

0.3 -4.5

0.4 -4.4424

0.5 -3.852

0.6 -3.26160.7 -2.6712

0.8 -2.0808

0.9 -1.4904

1 -0.9

P(focus beats Discount) Optimal Cost

0 0

0.1 -1.125

0.2 -2.25

0.3 -3.375

0.4 -4.5

0.5 -5.4125

0.6 -6.189

0.7 -6.9655

0.8 -7.742

0.9 -8.3

1 -8.3


5/6

As the chances of Focus suing Forward go down, the expected loss to Forward goes down and

touches 0 as its ensured that Focus wont sue Forward.

-5

-4

-3

-2

-1

0

0 0.2 0.4 0.6 0.8 1

OptimalCost

P(Focus sues Forward)

SensIt 1.51 Trial Version, Only For

Evaluation, www.TreePlan.comP(Focus sues

Forward) Optimal Cost0 0

0.1 -0.5

0.2 -1

0.3 -1.5

0.4 -2

0.5 -2.5

0.6 -3

0.7 -3.5

0.8 -4

0.9 -4.51 -4.686


6/6

Basic Tree:

Kindly look into Excel sheet 2 for the complete decision tree.

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