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EMV Problem for Page Engineering

Page Engineering designs and constructs air conditioning and heating (HVAC) systems for hospitals and clinics. Currently the company's staff is overloaded with design work. There is a major design project due in 8 weeks. The penalty for completing the design late is $14,000 per week, since any delay will cause the facility to open later than anticipated, and cost the client significant revenue. If the company uses its inside engineers to complete the design, it will have to pay them overtime for all work. Page has estimated that it will cost $12,000 per week (wages and overhead), including late weeks, to have company engineers complete the design. Page is also considering having an outside engineering firm do the design. A bid of $92,000 has been received for the completed design. Yet another option for completing the design is to conduct a joint design by having a third engineering company complete all electromechanical components of the design at a cost of $56,600. Page would then complete the rest of the design and control systems at an estimated cost of $30,000.

Page has estimated the following probabilities of completing the project within various time frames when using each of the three options. Those estimates are shown in the following table:

Probability of Completing the Design

Option On-Time 1 wk. late 2 wks. Late 3 wks. Late

Internal Eng. 0.4 0.5 0.1 -------
External Eng. 0.2 0.4 0.3 0.1
Joint Design 0.1 0.3 0.4 0.2

What is the best decision based on an expected monetary value criterion?

Solution Summary

The decision is made based on the expected value in an attached Word document of 395 words.