The Energy Tech Company is considering making a bid for a fuel processing contract from the Uganda government. Energy Tech's CEO decided to bid $112 million. The management team estimates that it has a 60% chance of winning the contract with this bid amount. If the company wins the contract, it can choose one of three methods for processing the fuel. The company can develop a new method to process the fuel, use the existing process, though inefficient, or to subcontract the processing to a number of smaller companies once they get the fuel. The following tables present the results of these alternatives: DEVELOP NEW PROCESS Outcomes Probability Profit in ($1,000,000s) High success 0.30 $600 Moderate success 0.60 $300 Failure 0.10 ($100) USE CURRENT, BUT INEFFICIENT PROCESS: Outcomes Probability Profit ($1,000,000s) High success 0.50 $300 Moderate success 0.30 $200 Failure 0.20 ($40) SUBCONTRACT: Outcome Probability Profit ($1,000,000s) Moderate success 1.00 $250 It will cost Energy Tech $2 million to prepare the bid proposal. If Energy Tech the company does not make a bid, it will invest in an alternative venture with a guaranteed profit of $30 million. 1) Construct a complete decision tree for Energy Tech. 2) Recommend whether or not the company should make a bid. Explain your answe
The Energy Tech Company is considering making a bid for a fuel processing contract from the Uganda government. Energy Tech's CEO decided to bid $112 million. The management team estimates that it has a 60% chance of winning the contract with this bid amount.
If the company wins the contract, it can choose one of three methods for processing the fuel. The company can develop a new method to process the fuel, use the existing process, though inefficient, or to subcontract the processing to a number of smaller companies once they get the fuel.
The following tables present the results of these alternatives:
DEVELOP NEW PROCESS
|
Outcomes |
Probability |
Profit in ($1,000,000s) |
|
High success |
0.30 |
$600 |
|
Moderate success |
0.60 |
$300 |
|
Failure |
0.10 |
($100) |
USE CURRENT, BUT INEFFICIENT PROCESS:
|
Outcomes |
Probability |
Profit ($1,000,000s) |
|
High success |
0.50 |
$300 |
|
Moderate success |
0.30 |
$200 |
|
Failure |
0.20 |
($40) |
SUBCONTRACT:
|
Outcome |
Probability |
Profit ($1,000,000s) |
|
Moderate success |
1.00 |
$250 |
It will cost Energy Tech $2 million to prepare the bid proposal. If Energy Tech the company does not make a bid, it will invest in an alternative venture with a guaranteed profit of $30 million.
1) Construct a complete decision tree for Energy Tech.
2) Recommend whether or not the company should make a bid. Explain your answer.
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