Orion Controls is a leading manufacturer of industrial valve systems, and Nathan Armstrong, head of Marketing, had been contacted by Andre Gide, EVP of Avion Chemical to place an order for 50 of Orion’s SV44A-10 smart valves. The price of the SV44A-10 smart valves was $10,000 each, so the order for 50 valves would come to $500,000. But discussions turned to the possibility of Orion developing an improved model for a higher price.

The improved value would require the development of flow-sensing-and-control software as well as a significant improvement in valve design to accommodate the exacting value-gate positioning demanded by Avion’s specifications. Owing to various technological challenges and resource limitations, there was a possibility that Orion would not be able to complete the improved valve within the nine-month deadline required by Avion’s Safety Program schedule. In addition to the scheduling problems, the proposed contract contained a merit-pricing clause, but the valve-development effort might not result in a valve of sufficient quality to merit a price that would cover both development and production costs. Armstrong needed to prepare a response to the Avion offer that would also satisfy the financial objectives of an internal review board.

• In your analysis, ignore the time value of money. Build a decision tree to model the choice of valves to sell to Avion that Armstrong faces. Assume that if Armstrong chooses to deliver the new improved "Super" valve, he will be committed to this decision and go through all the required development phases regardless of the economic consequences unless the development fails, in which case if will sell the old valve.

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Answer Explanation iA flow control valves primary function is to enable its user to modify the volume of fluid that moves through a particular section ... View the full answer