Seminar in Decision Theory MGM721

A company is trying to decide whether to bid for a certain contract or not. They estimate that merely preparing the bid will cost $10,000. If their company bid then they estimate that there is a 50% chance that their bid will be put on the "short-list", otherwise their bid will be rejected.

If "short-listed" the company will have to supply further detailed information (incurring costs estimated at $5,000). After this stage their bid will either be accepted or rejected.

The company estimates that the labour and material costs associated with the contract are $127,000. They are considering three possible bid prices, namely $155,000, $170,000 and $190,000. They estimate that the probability of these bids being accepted (once they have been short-listed) is 0.90, 0.75 and 0.35 respectively.

1. What should the company do, and what is the expected monetary value of your suggested course of action?
2. Draw a decision tree with proper symbols and labels to help you make the decision.