Looking for help on Decision Trees

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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 0 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. It can develop a new method for oil extraction, use an existing (inefficient) process, or subcontract the processing 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

Moderate success

.30

200

Failure

.20

-40

 

Subcontract:

Outcome

Probability

Profit (1,000,000s)

Moderate success

1.00

250

 

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 sequential decision tree for this decision situation and determine whether the company should make a bid.

 

    • 6 years ago
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