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 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. 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 (,000,000s)
|
|
Great success
|
.30
|
$ 600
|
|
Moderate success
|
.60
|
300
|
|
Failure
|
.10
|
-100
|
Use present process:
|
Outcomes
|
Probability
|
Profit (,000,000s)
|
|
Great success
|
.50
|
$ 300
|
|
Moderate success
|
.30
|
200
|
|
Failure
|
.20
|
-40
|
Subcontract:
|
Outcome
|
Probability
|
Profit (,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.