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 A
and provides strength to the helicopter blade. Due to the unusual length and size of the Heavy Lift Helicopter bla
engineering department has prepared two alternatives for developing the blade spar: (1) sectioning or (2) an imp
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 len
definitely produce an adequate 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
if this first step is successful, the second step will require another six months of work. If both steps are successfu
2 are 0.9 and 0.75, respectively. However, if either step is unsuccessful (which will be known only in six months f
of any costs already incurred.

Development of the blade spar must be completed within 18 months to avoid holding up the rest of the contrac
$1.8 million to $2.4 million. The director of engineering, Dr. Smith, wants to try developing the improved extrusi
be sizable. Although these side benefits are difficult to gauge, Dr. Smith’s best guess is an additional $2 million. (

Develop a decision tree to maximize Ventron’s EMV. This includes the revenue from this project, the side benefi
discounting or net present values are required. Summarize your findings in words in the spreadsheet.

What value of side benefits would make Ventron indifferent between the two alternatives?

How much would Ventron be willing to pay, right now, for perfect information about both steps of the improved

# Sensitivity: Public
ontract by the U.S. Army Aviation Systems Command to develop a blade spar for its Heavy Lift Helicopter program. The blad
e Heavy Lift Helicopter blade, Ventron is unable to produce a single-piece blade spar of the required dimensions using existi
(1) sectioning or (2) an improved extrusion process. Ventron must decide which process to use. (Backing out of the contract
explained next.

blade spar of sufficient length. This work will require extensive testing and rework over a 12-month period at a total cost of
ng technology.

wo steps: (1) improve the material used, at a cost of $300,000, and (2) modify the extrusion press, at a cost of $960,000. The
f both steps are successful, the blade spar will be available at that time, that is, a year from now. The engineers estimate th
known only in six months for step 1 and in a year for step 2), Ventron will have no alternative but to switch to the sectioning

up the rest of the contract. If necessary, the sectioning work can be done on an accelerated basis in a six-month period, but
ping the improved extrusion process. He reasons that this is not only cheaper (if successful) for the current project, but its e
an additional $2 million. (These side benefits are obtained only if both steps of the modified extrusion process are complete

his project, the side benefits (if applicable) from an improved extrusion process, and relevant costs. You don’t need to worry
e spreadsheet.

tives?

oth steps of the improved extrusion process? (This information would tell Ventron, right now, the ultimate success or failur

# Sensitivity: Public
pter program. The blade spar is a metal tube that runs the length of
dimensions using existing extrusion equipment and material. The
king out of the contract at any point is not an option.) The risk report

period at a total cost of $1.8 million. Although this process will

a cost of $960,000. The first step will require six months of work, and
e engineers estimate that the probabilities of succeeding in steps 1 and
switch to the sectioning process—and incur the sectioning cost on top

a six-month period, but the cost of sectioning will then increase from
urrent project, but its expected side benefits for future projects could
on process are completed successfully.)

ou don’t need to worry about the time value of money; that is, no

timate success or failure outcomes of both steps.)

# Sensitivity: Public
 Case 6.4 Developing a Helicopter Component for Army

Part a. Development of the Decision Tree in order to Maximize

Option A Process - Sectioning
Option B Process -Improves Extrusion

200 (Months -12)

A (Option) (Dollars) Deciding
Option

DECIDE EMV=

B (Option) [0.1] Fail

Improvement
in Materials
[0.1] Success
Decide on
option
EMV= 1466.00

EMV=

Numbers are in K
Revenue: 2000.00
A Option

Sectioning (Cost) -1800.00 (Months -12)

ACC Sectioning (Cost) -2400.00 (Months -6)

Calculation of Probabilities
B Option Success Fail
Improvement in Materials -300.00 Months -6 0.9 0.1
Process of Modification -960.00 Months -6 0.75 0.25
Benefits (Side) 2000.00 If and Only if, both are successful.

Requirement for Conditio

1 The work has to be completed in 18 Months.
NOTE: It is assumed that Step 1 and Step 2 are independent.
The process of Extrusion is beneficial.

Part b. The Value of Side Benefits be

# Sensitivity: Public Part c. Ventron's Willingness to pay for the
 Part b. The Value of Side Benefits be
Part c. Ventron's Willingness to pay for the
Calculation of E.M.V with PI (free) - E.M.
The pro
Furthermore, EMV for sectioning p
Yes, the answer can be found. Ventron has the str
EVPI = 1266000

By changing the different types of data , the side benefits is ca

# Sensitivity: Public
in order to Maximize the EMV for Ventron

Deciding Sectioning
Option -100.00 (Months -18)

-100.00

section -100.00 (Months - 18)

Decide on FAIL
option

Procees of
Modification
1640.00
modify press

EMV= 1640.00 SUCCESS

lue of Side Benefits between two alternatives.

lingness toSensitivity:
#
pay for thePublic
Improved Extrusion Process
lue of Side Benefits between two alternatives.
lingness to pay for the Improved Extrusion Process

The process calculates the EMV with free information to be 1,466,000.

, EMV for sectioning proces without any information is 200,000. 00. Therefore, it is recommonded to subscribe.
nd. Ventron has the strong willingness to pay for the perfect information about the extrusion process whether it is succ
not.

, the side benefits is calculated to be 124,450 as all the numbers same.

# Sensitivity: Public
 -1660.00 Months -18 There ia a need for Accelerated Sectioning.

2740.00

# Sensitivity: Public
onded to subscribe.
process whether it is successful or

# Sensitivity: Public
 Case 6.4 Developing a Helicopter Component for Army

Ventron Different Between two Alternativ

A Option Process - Sectioning
B Option Process - Improved Extrusion

1,800,000 (12 month)

Process - Sectioning

Deciding Factor Improvement

in Materials

Process - Extrusion
300,000.00
Months - 6

1,800,000.00

Revenue: 2000
1 It hs to be completed in 18 Months.
Option 1

Cost of sectioning -1800.00 Months -12

Cost of acc sectioning -2400.00 Months -6

Calculation of Probabilities
Option 2 SUCCESS FAIL
Improve the material -300.00 Months - 6 0.9 0.1
Modify the press -960.00 Months - 6 0.75 0.25
Side benefits 2000.00 If and Only if, both are successful.

By changing the different types of data , the side benefits

# Sensitivity: Public
etween two Alternatives ?

180,000.00
section
1,800,000.00 (18 month)

600,000.00

Modification Percentage for Success (25%)

in process

Successful %90
960,000.00 Percentage for Success (75%)
6 months
693,333.00
1,487,999.70 Benefits (Side)

93,333.00

data , the side benefits is calculated to be 124,450 as all the numbers same.

# Sensitivity: Public
 2,400,000.00

-124,444.00

# Sensitivity: Public