>> Business Economics
Reston Aviation has been awarded a government contract that requires the fabrication of an unusually large helicopter blade spar. Barbara Matthews, Reston’s President, is faced with two alternatives:
(1) Sectioning: an extension of current technology, thus involving no uncertainty, requiring 12 months at $150,000/month. (2) Extrusion: a new process that is comprised of two 6-month tasks. Press modification requires 6 months and involves a cost of $50,000/month. Material development requires 6 months and involves a cost of $160,000/month. Neither is certain to succeed, and both have to succeed in order for the extrusion option to yield the required spur. In order for the project to continue as necessary, the blade spar must be completed within 18 months. If the extrusion experiment fails to produce a working process within the 12 month period, sectioning could be accelerated to 6 months' duration requiring additional expense (6 months @ $400,000/month)
Barbara Matthews and her chief of engineering, Dr. Smith would like to see the company in possession of a viable extrusion process, as they feel it would improve future prospects, but they are aware of the substantial risks involved. In fact, the engineering department has provided assessments of costs and risks for this project. Those risks are summarized in Table 1.
Table 1: Assessment of Risk for Fabrication of Helicopter Spar
P(successful material development) 90%
P(successful press development) 75%
Barbara Matthews and Dr. Smith must choose a strategy for developing the spar. For your analysis, interpret the technological situation in the case as being such that any sequence or combination of steps is technically possible (in other words, if Reston decides to try the extrusion experiment, they can either do press modification first, or do material development first, or they can do both simultaneously).