The Oil India Corporation is considering whether to go for an offshore drilling contract to be awarded in Bombay High. If they bid, value would be Rs 600 million with 65% chance of gaining the contract.

The Corporation may set up a new drilling operation or move already existing operation, which has proved successful, to new site. The probability of success and expected returns are as follows:

If the Corporation does not bid or lose the contract, they can use Rs 600 million to modernise their operations.
This would result in a return of either 5% or 8% on the sum invested with probabilities 0.45 and 0.55, respectively.

(a) Construct a decision tree for the problem showing clearly the courses of action.

(b) By applying an appropriate decision criterion recommend whether or not the Corporation should bid the contract.

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Existing Operation Expected Revenue (Rs million) 700 350 New Drilling Operation Outcome Expected Revenue Probability (Rs million) Probability Success Failure 0.75 800 0.85 0.25 200 0.15