A company has just won a contract worth K16 million if it delivers a successful product on time, but only K8 million if it is late. The company has to decide whether to produce the work in-house or to sub-contract it. The latter option would cost K10 million and would make it certain that the product will be delivered on time.

Producing the work in-house would only cost K4 million but would only have 80 % chance of delivering a successful product on time. In the vent of an unsuccessful product there would be insufficient time to manufacture the product internallybut there would still be the option of of either a late rejection of the contract(at a further cost of K2 million) or of late sub-contracting the work on the same terms as before. With this late start, the sub-contractor is estimated to have only a 50:50 chance of producing the work on time or of producing it late . in this case the sub-contractor still has to be paid K10 million , regardless of whether he meets the deadline or not.

Required:

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Draw a decion tree for the company including all relevant data on the diagram. (5 marks)

Calculate expected values as appropriate and recommend a course of action with reasons.