United Aerospace has been invited to bid on doing the development work for a new U.S. Air Force bomber. United estimates that the cost of doing the development work will depend on potential technical difficulties but will be either $150 million or $200 million. United estimates that it is three times more likely that the cost will be $150 million than $200 million.
United is planning to bid $125 million, $175 million, $200 million, or $225 million for this project. If it bids $125 million, it feels that there is a 85% chance it will win the contract, whereas if it bids $175 million it feels that there is a 70% chance it will get the contract. If the firm bids $200 million it feels that the chance of winning the contract decreases to 40%, and if the firm bids $225 million it feels that there is only a 15 % chance that it will win the contract.
Following the development work, the Air Force will want to hire a firm to build 100 of these bombers. If United Aerospace wins the development contract, it feels that it will have the inside track for winning the contract to build the 100 bombers. Specifically, United Aerospace believes that there is a 70% chance that it will win this contract, whereas if it does not do the development work, the chance of the firm getting the contract to build the bombers is only 15%. On the building project, United Aerospace estimates that there is a 30% chance it would earn $300 million, a 40% chance that it would earn $100 million, a 20% chance that it would earn $50 million, and a 10% chance that it would lose $75 million.
Determine United Aerospace’s optimal strategy for bidding on the development project.