1. The Washington Metro is considering installation of automatic train speed regulators on a section of track where problems have occurred. There are two vendors proposing to provide the equipment and do the installation: Innovative and Venerable. Venerable has a long history of developing these systems, and has a set price of $14Million. Innovative has a new design that has never been installed anywhere. Eager to prove their system, they offer the installed system for only $9Million. WMATA has an estimate that it is 60% likely that the Innovative system will work in our system. If the Innovative system is installed but fails, WMATA will not get a refund from Innovative, will have to remove the Innovative system (which will involve an additional $2Million in costs) and then install the Venerable system (at the original set price of $14Million). WMATA wants to base its decision on the expected value of minimum cost to the Metro system.

1. Draw a decision tree to describe the options, and indicate which is the preferred vendor, and why.
2. If a test were available that provided perfect information on whether the Innovative system would or would not work -the expectation that it would work in the test is still 60% - what is the maximum WMATA be willing to pay for such a test? Show how the tree is modified and explain your rationale for the max cost for the test.