Appshop is a full-service Oracle consulting, applications management and outsourcing company. The company is deciding on how, and whether, to do the OS-7 project, a major implementation of Oracle software for a major client. It has estimated the total time and cost of doing the project. Its initial proposal to bill the client $175,000 each month over 24 months hasn't been accepted by the client. In fact, the client has o_ered Appshop two alternatives:

1. Equal payments of $155,000 a month over 24 months, or,

2. $125,000 a month plus a $1.5 million bonus paid at the end of month 24, if the work was satisfactory

(using standard measurements against stated benchmarks)

Based on past experience, the complexity, and uniqueness of the project, Clark's team estimate a probability

of 0.7 of receiving the bonus. If Appshop did not accept one of the two alternatives, then the client would

distribute a Request for Proposal (RFP) to Appshop's competitors. The winning bidder would get the project

and be paid the revenue winning bid at the end of each month. In addition, the winner would be paid a

gain-share reward at the end of month 24. The gain share reward would be based on documented savings

the client would realize from the new Oracle applications, using precise cost-accounting procedures described

in the RFP. Clark and his team use their previous experience with the OS-7 implementation to forecast the

client's savings.

Appshop would bid $150,000 a month for the RFP, if it were issued. The estimated probability of winning the RFP is 0.45.

Appraise the risk of the alternatives and recommend what Eric Clark should choose. Please make sure that

your report and the analysis answer the following questions.