A company is trying to decide whether to bid for a certain job or not. They estimate that merely pre

A company is trying to decide whether to bid for a certain job or not. They estimate that merely preparing the bid will cost $10,000. If their company bid then they estimate that there is a 50% chance that their bid will be put on the “short-list”, otherwise their bid will be rejected. Once “short-listed”, the company will have to supply further detailed information (entailing costs estimated at $5,000) if they want to continue to bid, but they can also quit without any cost. The company estimates that the labor and material costs associated with doing the job are $127,000. They are considering three possible bid prices, namely $155,000, $170,000 and $190,000. They estimate that the probability of these bids being accepted (once they have been short-listed) is 0.90, 0.75 and 0.35 respectively. Note that the bid price is what the company receives from the job provider. In this problem, time value of money is ignored.

a) (10pt) Draw the decision tree of this problem and clearly point out at each decision node which decision should be made.

b) (10pt) What is the expected value of your suggested course of action?

c) (5pt) What should the company do?

 

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