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 com-
ponent in the timing system that would be superior to any product in the mar-
ket. Progress in research has been slow, and Sarah is not sure whether her re-
search team can produce the microprocessor in time, although she feels that
there is a good chance. If they succeed, then Sarah’s company has an excellent
chance of of winning the $1 million contract for the timing system. If they do
not, then Sarah’s company would have to fall back on the current microproces-
sor technology that they have, and chances of winning the contract would be
slim.
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.