Existing virus-protection programs rely on virus databases that constantly need to be updated as

new viruses emerge. A typical virus-protection site license costs $3,000 per year for sites of less

than 350 machines and must be updated regularly. Regular updating of the databases costs

around $60 per computer per year. Furthermore, even with regular updating of the databases,

there is a possibility that unaccounted viruses will infect a company's computer systems. Virus-

protection experts estimate that with current virus protection software the probability that a

company will experience one complete system breakdown because of a virus within one year is

8%. Of the 8% of companies who experience a system breakdown, 25% also experience a

second breakdown sometime thereafter. The probability of more than two breakdowns is

virtually zero.

A complete system breakdown, which typically lasts one day, would cost $35,000 to a retail

company with 175 machines and $90,000 (in profits from lost sales) to a typical financial

services company with the same number of machines.

McBug Software Inc. is about to introduce new virus-protection software called HackOff.

HackOff is based on a "mutating-virus-simulator" (MVS), which according to McBug is going to

revolutionize the virus-protection landscape. The MVS essentially eliminates the need to update

virus databases continually. Moreover, the MVS is extremely powerful and, as a result,

increases the probability of detecting infected files. Researchers at McBug estimate that

companies equipped with HackOff have only a 1% probability of experiencing a virus-caused

complete system breakdown within a year, and a zero probability of experiencing more than one

of such breakdowns.

While the price of a HackOff site-license remains to be set, it is estimated that clients who adopt

the software would incur start-up costs (excluding the site license) of $35 per machine in

installation, configuration, training, etc.

Assuming no other costs of virus infection or software, calculate the economic value of HackOff

over the course of one year:

(a) for a retail company with 175 machines running under existing virus-protection software.

(b) for a typical financial services company with 175 machines running under existing virus-

protection software.

(c) McBug's CEO wants your advice about how to price HackOff. What do you recommend the

CEO do? (Your recommendation must include a suggestion about pricing and a brief

justification.)