Question
A construction company must decide whether to bid for a government contract and if the company decides to bid, it must decide how much to
A construction company must decide whether to bid for a government contract and if the company decides to bid, it must decide how much to bid. The government will award the contract to the low bidder. The company is sure that there will be other bidders, and the probability distribution on the lowest of their bids is: Less than $1.7 million with a probability of 0.15, Between $1.7 million and $1.75 million with a probability of 0.2, Between $1.75 million and $1.8 million with a probability of 0.25, Between $1.8 million and $1.9 million with a probability of 0.3, and Greater than $1.9 million with a probability of 0.1 The company estimates that the cost of placing a bid is $35K and the cost of fulfilling the contract, given that it wins the contract, is $1.6 million.
Create a decision tree and make a bid/no-bid and how much ($1.7M, $1.75M, $1.8M, or $1.9M) to bid recommendation by calculating the Expected Monetary Value (EVM).
The tree for making these decisions is shown in the Model tab. In the model, it's assumed you gain the amount of your bid, until you reach the chance event of underbidding a competitor or not. If you lose the bid, the amount of your bid is simply reversed. All probabilities and values are shown above the tree and referenced by the tree for calculations. This allows you to make changes to the probabilities, bid amounts, or costs to fulfill the contract, and the model will update all results automatically. Once the tree has been built and labeled with probabilities and monetary values, the best decision strategy is easy to see by following the TRUE branches from decision nodes. In this model, the company should place a bid, and the bid amount should be $170K. The expected monetary value from this strategy is $2900, the value in cell B44. The last three sheets show optional
PrecisionTree outputs from the Decision Analysis dropdown.
PLEASE PROVIDE STEP BY STEP ANSWERS AND EXPLAINATIONS FOR OPERATING PRECISIONTREE AND HOW EACH SOLUTION CAME TO BE. PICTURES WOULD BE HELPFUL TOO AND ANY FORMULAS USED. I WOULD LIKE TO KNOW ALL WORK THAT WAS DONE. EXPLAIN IT TO ME AS IF IT WAS MY FIRST TIME USING PERCISIONTREE, BECAUSE IT IS.
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