Reference no: EM132106443

Decision Tree A company is trying to decided whether to bid for a certain contract or not. They estimate that merely preparing the bid will cost $10,000. If their company bids, 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). After this stage, their bid will either be accepted or rejected. The company estimate that the labor and material costs associated with the contract 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. What should the company do and what is the expected monetary value of your suggested course of action? To answer this question, please draw the company’s decision tree and evaluate it according to the expected value criterion.