Cover Letter
The Appshop Inc case is based on the evaluation of the various alternatives available for the company while charging its client for execution of a project. Mr. Clark, Director, Central Region Appshop Inc had to make a decision on either accepting any one of the prices suggested by the client or participate in the bidding process. The case involves using Monte Carlo Simulation and Triangle Distribution to figure out the best possible option for Appshop Inc.
Executive Summary
Appshop Inc was a privately held, independent full-service Oracle consulting, applications and outsourcing company with revenues of $ 25 million. Mr. Eric Clark, Director, Central Region Appshop Inc was responsible for growing the company’s client base,…show more content… This would cost Appshop $ 140 per hour. Therefore, Appshop proposed $ 175,000 per month for 24 months. However, the client rejected this offer and proposed two alternatives. Alternative 1 was $ 155,000 per month for 24 months and Alternative 2 was $125,000 per month for the next 24 months along with a bonus component of $1.5 million. However, the bonus was based on meeting the multiple benchmarks set across various parameters. Appshop estimated the probability of receiving the bonus to be 0.7.
Analysis of Alternatives Proposed By the Client
To make comparisons, we need to calculate the present value of each of the amount that Appshop would receive from the client. The present value annuity factor would be = (1/r – 1/r (1+r) ^24), the discount rate is .5 per cent/month. Thus, the annuity factor calculated comes out to be 22.563.
Analyzing Alternative 1: $ 155,000 per month for 24 months
With this amount, the client would pay = 155,000 x 22.863 = $3,543,765. This amount is far below than the one proposed by Appshop of $3,948,525($175,000 x 22.563).
Analyzing Alternative 2: $ 125,000 per month for 24 months plus a $1.5 million bonus. The probability of Appshop receiving this bonus based on their calculations was 0.7.
With this amount, the client would pay = 125,000 x 22.563 = $2,820,375. To calculate the bonus, we need to firstly find the present value of $1.5
