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The cost of preparing the contract proposal is $2 million. If the company does not make a bid, it will invest in an alternative venture with a guaranteed profit of $30 million. Construct a se- quential decision tree for this decision situation and determine whether the company should make a bid.

The cost of preparing the contract proposal is $2 million. If the company does not make a bid, it will invest in an alternative venture with a guaranteed profit of $30 million. Construct a se- quential decision tree for this decision situation and determine whether the company should make a bid.

A First Course in Probability (10th Edition)
A First Course in Probability (10th Edition)
10th Edition
ISBN:9780134753119
Author:Sheldon Ross
Publisher:Sheldon Ross
Chapter1: Combinatorial Analysis
Section: Chapter Questions
Problem 1.1P: a. How many different 7-place license plates are possible if the first 2 places are for letters and...
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The Americo Oil Company is considering making a bid for a shale oil development contract to be awarded by the federal government. The company has decided to bid $112 million. The com- pany estimates that it has a 60% chance of winning the contract with this bid. If the firm wins the contract, it can choose one of three methods for getting the oil from the shale. It can develop a new method for oil extraction, use an existing (inefficient) process, or subcontract the process- ing to a number of smaller companies once the shale has been excavated. The results from these alternatives are as follows: Develop new process: Outcomes Probability Profit ($1,000,000s) Great success .30 $ 600 Moderate success .60 300 Failure .10 -100 Use present process: Outcomes Probability Profit ($1,000,000s) Great success .50 $ 300 .30 200 Moderate success Failure 20 -40 Subcontract: Outcome Probability Profit ($1,000,000s) 250 Moderate success 1.00 The cost of preparing the contract proposal is $2 million. If the company does not make a bid, it will invest in an alternative venture with a guaranteed profit of $30 million. Construct a se- quential decision tree for this decision situation and determine whether the company should make a bid.
Transcribed Image Text:The Americo Oil Company is considering making a bid for a shale oil development contract to be awarded by the federal government. The company has decided to bid $112 million. The com- pany estimates that it has a 60% chance of winning the contract with this bid. If the firm wins the contract, it can choose one of three methods for getting the oil from the shale. It can develop a new method for oil extraction, use an existing (inefficient) process, or subcontract the process- ing to a number of smaller companies once the shale has been excavated. The results from these alternatives are as follows: Develop new process: Outcomes Probability Profit ($1,000,000s) Great success .30 $ 600 Moderate success .60 300 Failure .10 -100 Use present process: Outcomes Probability Profit ($1,000,000s) Great success .50 $ 300 .30 200 Moderate success Failure 20 -40 Subcontract: Outcome Probability Profit ($1,000,000s) 250 Moderate success 1.00 The cost of preparing the contract proposal is $2 million. If the company does not make a bid, it will invest in an alternative venture with a guaranteed profit of $30 million. Construct a se- quential decision tree for this decision situation and determine whether the company should make a bid.
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