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DEVELOPING A HELICOPTER COMPONENT FOR THE ARMY The…
DEVELOPING A HELICOPTER COMPONENT FOR THE ARMY
The Ventron Engineering Company has just been awarded a $2 million development contract 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 provides strength to the helicopter blade. Due to the Heavy Lift Helicopter blade’s unusual length and size, Ventron cannot 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 improved 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 engineering department. The information from this report is explained next.
The sectioning option involves joining several shorter lengths of extruded metal into a blade spar of sufficient size. This work will require extensive testing and rework over 12 months at $1.8 million. Although this process will produce a good 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 for $300,000, and (2) modify the extrusion press for $960,000. The first step will require six months of work; if this first step is successful, the second step will require another six months. If both steps are successful, the blade spar will be available at that time, a year from now. The engineers estimate that the probability of succeeding in steps 1 and 2 is 0.9 and 0.75, respectively. However, suppose either step is unsuccessful (which will be known only in six months for step 1 and a year for step 2). In that case, Ventron will have no alternative but to switch to the sectioning processand incur the sectioning cost on top of any expenses 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 accelerated in six months, but the cost of sectioning will increase from $1.8 million to $2.4 million. The director of engineering, Dr. Smith, wants to try developing an improved extrusion process. He reasons that this is not only cheaper (if successful) for the current project, but its expected side benefits for future projects could be sizable. Although these side benefits are difficult to gauge, Dr. Smith’s best guess is an additional $2 million. (These side benefits are obtained only if both steps of the modified extrusion process are completed successfully.)
A: “Develop a decision tree to maximize Ventron’s EMV. This includes the revenue from this project, the side benefits (if applicable) from an improved extrusion pro-cess, and relevant costs. You don’t need to worry about the time value of money; that is, no discounting or net present values are required. Summarize your findings in words in the spreadsheet.
b.What value of side benefits would make Ventron indif-ferent between the two alternatives?
C. How much would Ventron be willing to pay, right now, for perfect information about both steps of the improved extrusion process? (This information would tell Ventron, right now, the ultimate success or failure outcomes of both steps.)”
****** So far this is what I have and need an honest review of how I did, any changes I should make, if I’m doing it wrong, need to make any changes etc….Thanks so much**********************
a)
Decision Probability Cost
Improved extrusion process (Success in step 1, Success in step 2) 0.9 x 0.75 = 0.675 $1,260,000
Improved extrusion process (Success in step 1, Failure in step 2) 0.9 x 0.25 = 0.225 $1,260,000
Improved extrusion process (Failure in step 1) 0.1 $1,260,000
Sectioning process (Without acceleration) 0.4 x 1 = 0.4 $1,800,000
Sectioning process (With acceleration) 0.6 x 1 = 0.6 $2,400,000
The optimal decision is for Ventron to pursue sectioning process which has a higher EMV of $2040000
b) We must determine the difference in EMV between the two solutions at various side benefit values in order to determine the value of side benefits that would render Ventron indifferent between the two alternatives. In order to ascertain the value of additional advantages that would lead Ventron to be indifferent between the two options available, we can compute the disparity in Expected Monetary Value (EMV) between the current and sectioning processes. By doing so, we can better understand the potential benefits and make an informed decision.
The calculation for the difference in EMV between the sectioning process without acceleration and the current sectioning process is as follows: Sectioning Process with with acceleration EMV ($2,400,000) minus Current sectioning Process EMV ($1,800,000), which equals a difference of $600,000. Consequently, if the added value of non-primary benefits derived from employing the sectioning process with acceleration surpasses $600,000, Ventron would be more inclined to choose this method over their present extrusion process.
Additionally, we can analyze how much Ventron would be prepared to invest for flawless information concerning both phases of the improved extrusion process. In order to make this evaluation, we can compute the variance in EMV between having access to perfect information and relying on the current available data.
c) Ventron will be willing to the expected value of perfect information (EVPI) in order to obtain the perfect information about both sides of Sectioning process. The expected value of sectioning process is $2,400,000. Therefore, the EVPI is $2,400,000-$1,800,000=$600000
Image transcription text
Decision Probability Cost Improved extrusion process (Success in step 1, Success in step 2) 0.9 x 0.75 = 0.675
$1,260,000 Improved extrusion process (Success in step 1, Failure in step 2) 0.9 x 0.25 = 0.225 $1,260,000
Improved extrusion process (Failure in step 1) 0.1 $1,260,000 Sectioning process (Without accelera…
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