Problem 1 The Ventron Engineering Company has just been awarded a $2 million development con- tract by the U.S. Army Aviation Systems Command to develop a blade spar for its Heavy Lift Helicopter program. The blade spar is a metal tube that runs the length of and pro- vides strength to the helicopter blade. Due to the unusual length and size of the Heavy Lift Helicopter blade, Ventron is unable to produce a single-piece blade spar of the required dimensions, using existing extrusion equipment and material. The engineering department has prepared two alternatives for developing the blade spar: (1) sectioning or (2) an im- proved extrusion process. Ventron must decide which process to use. (Backing out of the contract at any point is not an option.) The risk report has been prepared by the engineer- ing department. The information from it is explained next. The sectioning option involves joining several shorter lengths of extruded metal into a blade spare of suicient length. This work will require extensive testing and rework over a 12-month period at a total cost of $1.8 million. Although this process will denitely produce an adequate blade spar, it merely represents an extension of existing technology. To improve the extrusion process, on the other hand, it will be necessary to perform two steps: (1) improve the material used, at a cost of $300,000, and (2) modify the extrusion process, at a cost of $960,000. The rst step will require 6 months of work, and if this rst step is successful, the second step will require another 6 months of work. If both steps are successful, the second step will require another 6 months of work. If both steps are successful, the blade spar will be available at that time, that is, a year from now. The engineers estimate that the probability of succeeding in steps 1 and 2 are 0.9 and 0.75 respectively. However, if either step is unsuccessful (which will be known in 6 months for step 1 and in a year for step 2), Ventron will have no arternative but to switch to the sectioning process - and incur the sectioning cost on top of any costs already incurred. Development of the blade spar must be completed within 18 months to avoid holding up the rest of the contract. If necessary, the sectioning work can be done on an accelerated basis in a 6-month period, but the cost of sectioning will then increase from $1.8 million to $2.4 million. Frankly, the Director of Engineering, Dr. Smith, wants to try developing the improved extrusion process. This is not only cheaper (if successful) for the current project, but its expected side benets for future projects could be sizable. Although these side benets are diicult to gauge, Dr. Smiths best guess is an additional $2 million. (Of course, these side benets are obtained only if both steps of the modied extrusion process are completed successfully.) a) Develop a decision tree to maximize Ventrons expected value. This includes the revenue from the project, the side benets (if applicable) from an improved extrusion process, and
