Risk Management Assignment

Group 6
0308/52
0313/52
0338/52
0345/52
0357/52
0363/52

RAJDEEP MURMU
RAMGOPAL VARMA BALARAJU
SAI
SAI SHIVA RAMA KRISHNA
SIRIMALLA
SANDEEP KUMAR PAL
SAURABH BHITKAR
SHAH DHWANIL RAJENDRA

Introduction
Focus Software, the makers of the Focus ABC software have sued Discount software regarding their
product 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, then
Forward 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.

Sensitivity of the value of information with respect to accuracy

Accuracy
0.9
0.91
0.92
0.93
0.94
0.95
0.96
0.97
0.98
0.99
1

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-4.1
-4.15
Optimal Cost

-4.2
-4.25
-4.3
-4.35
-4.4
-4.45
-4.5
0.9

0.92

0.94

0.96

0.98

Optimal Cost
-4.5
-4.5
-4.5
-4.4866
-4.4368
-4.387
-4.3372
-4.2874
-4.2376
-4.1878
-4.138

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

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-4.43
Expected Loss

-4.44
-4.45
-4.46
-4.47
-4.48
-4.49
-4.5
-0.7

-0.65

-0.6
Cost of Study

-0.55

-0.5

Cost of
Study
-0.7
-0.68
-0.66
-0.64
-0.62
-0.6
-0.58
-0.56
-0.54
-0.52
-0.5

Expected Loss
-4.5
-4.5
-4.5
-4.5
-4.5
-4.5
-4.5
-4.496
-4.476
-4.456
-4.436

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

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P(forward wins the trial)

0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1

-0.5
-1
Optimal Cost

-1.5
-2
-2.5
-3
-3.5
-4
-4.5
0

0.2

0.4

0.6

0.8

Optimal Cost
-4.5
-4.5
-4.5
-4.5
-4.4424
-3.852
-3.2616
-2.6712
-2.0808
-1.4904
-0.9

P(forward wins the trial)

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.

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P(focus beats Discount)

0
-1
Optimal Cost

-2
-3
-4
-5
-6
-7
-8
-9
0

0.2

0.4

0.6

0.8

Probability focus beats discount

0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1

Optimal Cost
0
-1.125
-2.25
-3.375
-4.5
-5.4125
-6.189
-6.9655
-7.742
-8.3
-8.3

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.

SensIt 1.51 Trial Version, Only For

Evaluation, www.TreePlan.com
0
Optimal Cost

-1
-2
-3
-4
-5
0

0.2

0.4

0.6

P(Focus sues Forward)

0.8

P(Focus sues
Forward)
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1

Optimal Cost
0
-0.5
-1
-1.5
-2
-2.5
-3
-3.5
-4
-4.5
-4.686

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.

Basic Tree:

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