An organization must decide whether to develop a new client-server application in-house or contract it out to an external consultant. If the application is developed in-house, there is a 60% chance that the project will succeed. The payoff for success and failure (for in-house development) are estimated to be $600,000 and –$100,000 respectively. If the application is contracted out to the external consultant, the payoffs for success and failure are, respectively, $500,000 and –$200,000. The probability that the external contractor will succeed is 0.5.
Should the organization contract out the project? Justify your answer. (Assume that the decision maker is risk neutral)
At least how high should the probability of success for the contractor be for the organization to decide to contract the project out?
Let the probability that the contractor will succeed be p.