A contractor has decided to place a bid for a project. Bids are to be set in multiples of $20,000. It is estimated that the probability that a bid of $240,000 will secure the contract is 2, the probability that a bid of $220,000 will be successful is .6, and the probability that a bid of $200,000 will be accepted is .8. It is thought that any bid under $200,000 is certain to succeed and any bid over $240,000 is certain to fail. If the manufacturer wins the con- tract, he must solve a design problem with two possible choices at this stage. He can hire outside consultants, who will guarantee a satisfactory solution, for a price of $80,000. Alternatively, he can invest $30,000 of his own resources in an attempt to solve the prob- lem intemally; if this effort fails, he must then engage the consultants. It is estimated that the probability of successfully solving the problem internally is 6.

Once this problem has been solved, the additional cost of fulfilling the contract is $140,000.

(a) Potentially, this contractor has two decisions to make. What are they?

(b) Draw the decision tree.

(c) What is the optimal course of action, according to the expected monetary value criterion?