Hanna FrontierSoftware Solutions, Inc. (HFSI) has been investigating thepossibility of developing a simulation software that can be usedfor analyzing risk and return from alternative lines of investment.The company is currently trying to decide between four proposedversions of the software: Simple (SS), Moderately Sophisticated(MSP), Sophisticated (SP), and Highly Sophisticated (HSP) versionsof the software at respective development costs of $100,000,$200,000, $250,000, and $400,000.

• If the performanceof the prototype developed by HFSI is better than existing software(a success), HFSI believes that it could sell the rights to itssimulation software to a larger software developer for $250,000,$400,000, $650,000, and $880,000 for the SS, MSP,SP, and HSPversions, respectively.

• If the performanceof the prototype developed by HFSI does not exceed the performanceof the existing software (a failure), HFSI believes that it couldstill sell the rights to its simulation software to a largersoftware developer for $100,000, $130,000, $170,000, and $190,000for the SS, MSP,SP, and HSP versions, respectively.

• HFSI estimates thatthe probability of a success for the software is 60%. However, thecompany also has the opportunity to hire a consultant whospecializes in the study of markets for software. The consultantuses a market survey information to predict success or failure forsoftware. In the past the consultant predicted a success for aprototype software in 85% of cases where the eventual product was asuccess. However, the consultant also predicted a success for theprototype in 25% of cases where the eventual product was a failure.The consultant’s fee for the service is $20,000.

1. What is the maximum amount HFSI should be willing to pay for aperfect forecast of success or failure for their software? Show thenecessary steps. [2 points]
2. What is the maximum amount HFSI should be willing to pay forthe consultant’s market survey information (EVSI)? On the basis ofyour findings, should the company hire the consultant? Show all thenecessary steps. [7 points]