Sarah’s Dilemma

Sarah owns of a small electronics company. In three months, a proposal is due

for an electronic timing system for a major sporting event. For several years,
her company has been designing a new microprocessor, a critical component
in the timing system that would be superior to any product in the market. How-
ever, progress in research has been slow, and Sarah is not sure whether her re-
search team can produce the microprocessor in time. If they succeed, then
Sarah’s company has an excellent chance of about 80% of winning the $1 mil-
lion contract for the timing system. If they do not, then Sarah’s company would
have to fall back on the current microprocessor technology that they have, and
chances of winning the contract would be about 10%.
If she continues with the research project, then Sarah must immediately in-
vest $200,000 in research and development. Making a proposal requires devel-
oping a prototype timing system. Sarah already has an prototype model with
the current microprocessor. If she has to bid with the current technology, then
she can spruce up the prototype for the proposal at a cost of $20,000. If she
decides to bid with the new technology she has to build a new prototype from
scratch. Such a prototype will cost $50,000 to build. Finally if Sarah wins the
contract, then the finished product will need an additional $150,000 to pro-
duce.
Sarah is wondering what her course of action should be.