Question: The Extron oil company is considering making a bid for a shale oil development contract to be awarded by the government. The company has decided to bid $110 million. The company 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: 1. It can develop a new method for oil extraction, 2. use an existing inefficient process, 3. or subcontract the processing out 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(millions)

great success 0.30 $600

moderate success 0.60 300

failure 0.10 -100

Use Present Process

Outcomes Probability Profit(millions)

great success 0.50 $300

moderate 0.30 200

failure 0.20 -40

Subcontract

Outcome Probability Profit

moderate success 1.00 $250

The cost of preparing the contract proposal is $2,000,000. If the company doesn't make a bid, it will invest in an alternative venture with a guaranteed profit of $30 million. Construct a sequential decision tree for this decision situation and determine whether the company should make a bid.

Price: $2.99

Solution: The downloadable solution consists of 3 pages
Deliverable: Word Document