Analyzing Total Cost of Ownership and Product Reliability-Vendor Evaluation for an IT Project

Analyzing Total Cost of Ownership and Product Reliability-Vendor Evaluation for an IT Project

Risk

Vendor Selection

I would award the contract to Even IT. This is because Even IT seems like a safer choice as it offers a higher chance of reliability (80%) compared to Odd IT (60%), and the cost associated with failure is lower for Even IT ($750,000) compared to Odd IT ($850,000). While its upfront cost is higher, it offers an 80% chance of reliability compared to Odd IT’s 60%. Moreover, Even IT provides lifelong guarantees and maintenance, which can be crucial for long-term sustainability and cost-effectiveness. Our assignment writing services will allow you to attend to more important tasks as our experts handle your task.

Risk Calculation

a. Interpretation of the Risk Formula

The formula represents the expected cost associated with the potential negative outcomes (failures in this case) based on their probabilities.

Odd IT Risk Calculation:

Impact: $550,000

Probability of Failure: 40% (0.40)

Cost: $300,000

Calculation: Risk = $550,000 * (0.40 / $300,000) = 0.733

Even IT Risk Calculation

Impact: Difference in cost in case of failure = $750,000 – $300,000 = $450,000

Probability of Failure: 20% (0.20)

Cost: $750,000

Calculation: Risk = $450,000 * (0.20 / $750,000) = 0.12.

Choice Re-evaluation

The risk calculations previously performed showed a higher risk value for Odd IT compared to Even IT. This supports the initial choice of preferring Even IT, as it presents a lower risk in terms of potential financial impact and offers more reliability and long-term security through its guarantees and maintenance services.

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Lesson 7 – Risk
Are you a risk seeker, or are you risk averse?
A project manager is sourcing equipment for a new IT project and must choose between two vendors: Odd IT and Even IT.
To simplify the problem, the project manager decides to base the evaluation of the vendors’ proposals on the basis of total cost of ownership (TCO) and product reliability.

Analyzing Total Cost of Ownership and Product Reliability-Vendor Evaluation for an IT Project

* Through research and talking to other project managers, the manager finds that Odd IT has a 60% chance of providing reliable equipment and its parts cost $300,000 (this includes costs of installations and maintenance). There is, however, a 40% chance that the equipment will fail – in which case, costs could increase to $850,000.
*If Even IT is chosen, there is an 80% chance of high reliability at a cost of $750,000 and a 20% chance of failure. Even IT provides lifelong guarantees and maintenance services.
a. To which of the two vendors would you award the contract? Why?
2. Use the formula below to calculate the risk associated with each of the two vendor proposals. Hint: the impact of the Odd IT proposal would be $550,000.
Risk = Impact
Probability Cost
a. What does the value calculated by this formula represent?
b. Odd IT risk =
c. Even IT risk =
d. Should the choice you made above. Change? Why?
Pts