Decision theory

3. ILY Construction has been asked to submit a proposal for developing a new product.

The cost of preparation is P12,000.00. It is estimated that if ILY submits a proposal, the chance that it will receive the contract is 50%. It is not certain that the product can actually be developed, but there are three methods of development, of which one should be chosen. Method A will cost P120,000 and has 80% chance of success. Method B will cost P50,000 with a 60% probability of success. Method C will cost P30,000 and the probability of success is 45%. If the company receives the contract and supplies the product, it will receive P8,000,000. No penalty is charged for failing to produce the product. Should ILY Construction prepare the proposal? Explain why?

4. In problem number 3, suppose there is a penalty of P100,000 if the company fails to develop the product. Should the company prepare proposal? Why?