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The Americo Oil Company is considering making a bid for a shale oil development contract to be awarded by the federal government. The company has
The Americo Oil Company is considering making a bid for a shale oil development contract to be awarded by the federal government. The company has decided to bid $110 million. The company estimates that it has a 60% chance of winning the contract at this bid. If the firm wins the contract, there are three alternative methods for getting the oil from the shale. It can develop a new method for oil extraction, use an existing (inefficient) process, or subcontract the processing out to a number of smaller companies (once the shale has been excavated). It will cost $45 million to develop and operate a new process. The present method will cost $20 million, and it will cost $9 million to distribute the shale to subcontractors. The results from these alternatives are given as follows: Develop new process Outcomes: Probability Profit($1,000,000s) Success .30 $600 Moderate 300 Failure .10 -100 Use present process Outcomes: Probability Profit($1,000,000s) Success .50 $300 Moderate 200 Failure Subcontract Probability Profit($1,000,000s) Moderate 1.00 $250 .60 .30 20 -40 The cost of preparing the contract proposal is $2,000,000. If the company does not make a bid it will invest in an alternative venture with a guaranteed profit of $30 million. Construct a sequential decision tree for this decision situation and determine if a bid should be made
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