Dante Development Corporation (DDC) is considering bidding on a contract for a new office complex. The cost of preparing the bid is $200,000 and DDC believes there is an 80% chance that it will win the bid. If the company wins the bid it will have to pay $2,000,000 to become a partner in the project. Once the company becomes a partner in the project they can either build the project or sell off their partnership. Given the current market conditions there is a 60% chance that demand will be high and a 40% chance that demand will be moderate if they build the office complex. A high demand for the office complex will gain revenues of $5,000,000 while a moderate demand will have revenues of $3,000,000. If they choose to sell their partnership they can earn $3,500,000.

The difference in revenue between high demand and moderate demand is significant so DDC is considering hiring a market research company to assist them in their evaluation. The cost of the research is $150,000. The marketing company has a good track record and if the research indicates that demand will be high then there is 85% chance that demand will be high. The probabilities of the forecast are given in the table below.

Forecast High

Forecast Moderate

Probability

60%

40%

High Demand

85%

22.5%

Moderate Demand

15%

77.5%

DDC has the following profit equation.

Revenues (based on demand or sell) - bid fee - partnership fee - research fee (if done)

a) What is the optimal strategy for Dante Development Corporation and what is the expected profitability?

b) What would the cost of the market research study have to be to make Dante Development Corporation indifferent to doing the survey?