A contractor has decided to place a bid for a project. It is estimated that a bid of $240,000 will have a 20% chance of winning the contract; a bid of $220,000 has a 60% chance of winning, a

$200,000 bid has an 80% chance of winning. It is thought that any bid under $180,000 is certain to win while a bid of $260,000 or more is certain to lose.

If the manufacturer wins the contract, she must solve a design problem in one of two possible ways: she can hire outside consultants, who can guarantee a satisfactory solution, for a price of $80,000. Alternatively, she can invest $30,000 in an attempt to solve the design problem internally; if that effort fails, then she must hire the consultants. She estimates that the probability of successfully solving the design problem in-house is 60%. Once this problem has been solved, the additional cost of fulfilling the contract is $140,000.

a. Construct a decision tree to calculate the optimum decision.

b. Construct a simulation to calculate the probability distribution for each option and the optimum decision.

c. What information does the simulation provide that the decision tree does not—and vice versa?