The year is 2040, and you are in the supercomputer business. Your firm currently produces a machine

Question:

The year is 2040, and you are in the supercomputer business. Your firm currently produces a machine that is relatively expensive (list price $6million) and relatively slow (for supercomputers in the twenty-first century). The speed of supercomputers is measured in calculations, known asfloating point operations (€œflops€), per second. Thus, one 1 petaflop persecond = 1 pps, or one quadrillion calculations per second. Your current machine is capable of 150 pps. If you could do it, you would prefer to develop a supercomputer that costs less (to beat the competition) and is faster.
You have a research-and-development (R&D) decision to make as upper computer based on two alternatives. You can choose one or the other of the following projects, or neither, but budget constraints pre-vent you from engaging in both projects.
A. The super-supercomputer. This project involves the development of a machine that is extremely fast (800 pps) and relatively inexpensive ($5 million). But this is a fairly risky project. The engineers who have been involved in the early stages estimate that there is only a 50% chance that this project would succeed. If it fails, you will be stuck with your current machine.
B. The better supercomputer. This project would pursue the development of an $8 million machine capable of 500 gps. This project also is somewhat risky. The engineers believe that there is only a 40%chance that this project will achieve its goal. They quickly point out, however, that even if the $8 million, 500 gps machine does not materialize, the technology involved is such that they would at least be able to produce a $5 million machine capable of 350 gps. The decision tree is shown in Figure 14.21. To decide between the two alternatives, you have made the following assessments:
I. The best possible outcome is the $5 million, 800 gps machine, and the worst outcome is the status quo $6 million, 150 gpsmachine.
II. If you had the choice, you would be indifferent between Alternatives X and Y shown in Figure 14.22a.
III. If you had the choice, you would be indifferent between Alternatives X' and Y' in Figure 14.22b.
a. Using assessments I, II, and III, decide between Projects A and B. Justify your decision.
b. Explain why Project A appears to be riskier than Project B. Given that A is riskier than B, would you change your answer to part a? Why or why not?
Figure 14.21