Cutler - Hammer, Inc., an electronic equipment manufacturer in Swakopmund, was offered the option to purchase a license to produce and sell a new flight-safety system. Because of the pending legislative action, the market for the product was very uncertain. A team of Cutler - hammer personnel and outside analysts carried out an analysis to help the company decide whether to purchase the option to obtain this license. According to this team, if Cutler - Hammer, purchased this option, there was a 0.29 probability that it would not obtain the license, in which case it would lose $125, 000 and a 0.71 probability that it would obtain the license. If the company obtained such a license, the team estimated that there was a 0.85 probability that it would not obtain a defense contract, in which case it would lose $700, 000 and 0.15 probability that it would obtain a defense contract, in which case it would gain $5.25 million. (a) What is a decision tree? Construct the decision tree. (12 marks) (b) If Cutler-Hammer wanted to maximize expected profit, should it have purchased the option? Motivate your answer. (5 marks) (c) Cutler- Hammer also analyzed the consequences of another course of action: waiting and seeking a sublicense. The team estimated that such a course of action would result in the following probability distribution of profit:

After considerable discussion, a unanimous decision was made by the firm's decision making group to adopt this course of action. Can you rationalize this decision?