Scenario: The company is implementing a new Expense Management system that can automate the process of employees submitting home office or travel expenses and managers reviewing and approving them for payment. The new system is licensed from the vendor on a per-user and per-month basis, so when an employee submits an expense, your company is charged for that use of the system. However, the vendor offers a discount if a customer company signs a contract guaranteeing a minimum number of users according to a tiered user structure. For example, if the contract specifies at least 25 users will submit expenses in a month (Tier 1), the per user rate is $15.50; if the contract specifies at least 100 users (Tier 4), the per user rate drops to $6.50 per user. There is also an annual system access fee that is charged regardless the number of users, that differs according to the tier of service. In determining which tier to sign up for, you estimated the number of users who would regularly use the expense system. You found that 35 employees regularly submit expenses, but also found that the other 95 employees submit expenses occasionally
Tasks:
- In the Cashflows-and-Payoff worksheet, complete the Expected Annual Cash Outflows by calculating the values of the shaded cells. These values should be derived from the License Costs range. Note: carefully review the tiered pricing structure when calculating these amounts.
- Create a new worksheet titled "Decision-Heuristics” and copy the Expected Annual Cash Outflows to that worksheet.
- Using the Expected Annual Cash Outflows, formulate a decision model that shows what decision to
make using the Maximax, Maximin, and Averaging heuristics to decide which tier of service to
subscribe to. Based on your model, answer the questions in the workbook.
After reviewing prior expense claims, you estimate the following likelihoods for system usage:
- Based on this new information, formulate a decision model that shows what decision should be made based on the Expected Monetary Value (EMV) decision heuristic. Based on your model, answer the questions in the workbook.