Question: (25 points) Otis received an MBA degree last year. Prior to joining the MBA program, Otis worked for four years with, first as a software engineer and then as a project leader. After graduation, Otis teamed up with an old buddy from his company and a good friend in his MBA cohort and started Dynamic Software (DS), which is a developer, producer, and distributor of software products. Recently, they finished developing AccuImaging, a software package that is more than twice as accurate in detecting lung cancer from a patient’s CT data over existing software packages. AccuImaging has passed several scientific and clinical tests. Otis now has to decide how to market the software.

Otis is considering two basic marketing strategies. One strategy would be for DS to market the product themselves. One disadvantage of this strategy is that DS has little familiarity and/or experience with the medical software market, and so has a greater likelihood of making critical mistakes in their marketing operations. Of course, there are advantages to marketing AccuImaging themselves: greater control, possibly greater revenues, etc.

DS was recently approached by another software company, Ventura Computing, with a marketing offer. Venture Computing is a much bigger player and is well known in the industry. Ventura has proposed to DS to acquire exclusive marketing rights for AccuImaging and sell the package under its own brand name. In return, DS would receive a signing bonus of $150,000 plus a royalty of 15% on gross sales of AccuImaging. Furthermore, Ventura proposed a minimum royalty payment of $100,000 for the first twelve months.

In order to analyze the two possible marketing strategies, Otis has built a simulation model of the net (after taxes) earnings of AccuImaging based on a number of assumptions about the marketability of each of the two marketing strategies. These assumptions pertain to initial market size, market growth rates, years to obsolescence, promotion budgets, prices and variable costs, and possible financial arrangements with Ventura.

Otis ran 200 trials of his simulation model. Pertinent results are shown on the next page. Using these simulation results, answer the following questions:

(a) What is a good estimate of the probability that the DS marketing strategy will be more profitable than the Ventura marketing strategy?

(b) Construct a 98% confidence interval for the true mean of the difference in earnings between the two strategies.

(c) (10 points) Which of the two strategies would you recommend? Defend your decision with relevant analysis and supporting data.