Question

A contractor is deciding between submitting a bid for either a highway or a dam project (he cannot submit bids for both). The estimated bid price for the highway job is $1.5M (million), that for the dam is S3M. Cost for preparing a bid is 2% of the bid price, and estimated net profit is 10% of the bid price. The contractor estimates there is 70% chance to win the highway job, but only a 50-50 chance for getting the dam job. If he does not acquire any job, he will suffer an additional loss of $50,000 due to the idling of machinery and permanent staff (a) Construct the decision tree. (b) Determine the best alternative based on the following decision criteria: (i)mini-max (minimize maximum loss); (ii) maximum expected monetary value (EMV).

Answer 1