10. Dantey Development Corporation is considering bidding on a contract for a new office building complex. Dantey's Company must decide whether to bid on the contract or not. The cost of preparing the bid is $200,000. Based on past experience the company has a 0.80 probability of winning the contract if it submits a bid. If the company wins the bid, it will have to pay $2,000,000 to become a partner in the project. Dantey Company will consider doing a market rescarch study to forecast demand for the office units prior to beginning construction if the company wins the contract. The cost of this study is $150,000. The possible outcomes of the market research study can either be high or moderate forecasts. The likelihood of high forecast is 0.60. Dantey CEO must decide either to build the office complex or sell the rights in the project to another developer upon wining the contract whether the market research study was conducted or not. The decision to build the complex will result in an income of $5,000,000 if demand is high and $3,000,000 if demand is moderate. If Dantey chooses to sell its rights in the project to another developer, income from the sale is estimated to be $3,500,000. Past experience has shown that there is 0.85 probability of high demand if the complex is built and forecast is high. Similarly, there is 0.225 chance of high demand if the office complex is built and forecast is moderate. If no market research exists then the probability of high demand is estimated to be 0.60. a. Develop a decision tree for the Dantey Development Company problem. b. What is the optimal decision strategy for Dantey, and what is the expected value for this project?
10. Dantey Development Corporation is considering bidding on a contract for a new office building complex. Dantey's Company must decide whether to bid on the contract or not. The cost of preparing the bid is $200,000. Based on past experience the company has a 0.80 probability of winning the contract if it submits a bid. If the company wins the bid, it will have to pay $2,000,000 to become a partner in the project. Dantey Company will consider doing a market rescarch study to forecast demand for the office units prior to beginning construction if the company wins the contract. The cost of this study is $150,000. The possible outcomes of the market research study can either be high or moderate forecasts. The likelihood of high forecast is 0.60. Dantey CEO must decide either to build the office complex or sell the rights in the project to another developer upon wining the contract whether the market research study was conducted or not. The decision to build the complex will result in an income of $5,000,000 if demand is high and $3,000,000 if demand is moderate. If Dantey chooses to sell its rights in the project to another developer, income from the sale is estimated to be $3,500,000. Past experience has shown that there is 0.85 probability of high demand if the complex is built and forecast is high. Similarly, there is 0.225 chance of high demand if the office complex is built and forecast is moderate. If no market research exists then the probability of high demand is estimated to be 0.60. a. Develop a decision tree for the Dantey Development Company problem. b. What is the optimal decision strategy for Dantey, and what is the expected value for this project?
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
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Transcribed Image Text:10. Dantey Development Corporation is considering bidding on a contract for a new office building
complex. Dantey's Company must decide whether to bid on the contract or not. The cost of preparing
the bid is $200,000. Based on past experience the company has a 0.80 probability of winning the
contract if it submits a bid. If the company wins the bid, it will have to pay $2,000,000 to become a
partner in the project. Dantey Company will consider doing a market research study to forecast demand
for the office units prior to beginning construction if the company wins the contract. The cost of this
study is $150,000. The possible outcomes of the market research study can either be high or moderate
forecasts. The likelihood of high forecast is 0.60. Dantey CEO must decide either to build the office
complex or sell the rights in the project to another developer upon wining the contract whether the
market research study was conducted or not. The decision to build the complex will result in an income
of $5,000,000 if demand is high and $3,000,000 if demand is moderate. If Dantey chooses to sell its
rights in the project to another developer, income from the sale is estimated to be $3,500,000. Past
experience has shown that there is 0.85 probability of high demand if the complex is built and forecast
is high. Similarly, there is 0.225 chance of high demand if the office complex is built and forecast is
moderate. If no market research exists then the probability of high demand is estimated to be 0.60.
a. Develop a decision tree for the Dantey Development Company problem.
b. What is the optimal decision strategy for Dantey, and what is the expected value for this project?
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