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A company must decide which of the two software systems to install in the office. It has two choices: System A or System B.
The cost of purchasing system A is $2,700,000, but the cost of maintaining this system each year is uncertain. Based on its preliminary research, the company believes that the discounted life time maintenance cost for system A would be either $0, $500,000, or $1,000,000 with probabilities 0.2, 0.5, and 0.3, respectively. On the other hand, the cost of purchasing system B is slightly higher at $3,000,000, but its discounted life time maintenance cost is guaranteed to be $225,000 (through a service agreement with the seller).Before the purchase decision is made, the company can hire a consultant to evaluate the quality of System A. Such an independent evaluation will cost $100,000. If the consultant believes that System A is “Satisfactory”, there is a 50% chance that its discounted life time maintenance cost will be $0 and a 50% chance that its discounted life time maintenance cost will be $500,000.The doctor believes that the consultant will issue a “Satisfactory” report on System A with probability 0.40.Construct a decision tree and find the optimal strategy.
