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PS3 Doc An Oil Company is considering whether to make a bid for a shale oil development contract to be awarded by the federal government. The cost of preparing the contract proposal is $6,000,000 (and the company will incur this cost irrespective of whether they win or lose the bid. The company has decided to bid $210 million. The company estimates that it has a 60 percent chance of winning the contract with this bid. If the company 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 process, or subcontract the processing out to a 2 number of smaller companies once the shale has been excavated. The results from these alternatives are given as follows: Develop New Process Outcomes Great success Moderate success Failure Outcomes Great success Use Existing Process Probability Profit (millions) 0.30 $700 0.60 400 0.10 -100 Probability Profit (millions) 0.50 $700 Moderate success Failure 0.30 500 0.20 -50 Subcontract Outcome Probability Moderate success 1.00 Profit (millions) $400 If the company does not make a bid, it will invest in an alternative venture with a guaranteed profit of $100 million. Construct a decision tree for this decision situation. Determine whether the company should make the bid, and if so what are the best further decisions to be made. What is the associated EMV? Ans: Make bid; EMV-$162 million; if bid is a winning bid, then use existing process