Question 1 (10 points)
A general contractor has three options when bidding for three projects. He has the resources to undertake only one of the projects and must select the most profitable option. The first option is to act as a general contractor submitting a lump sum bid for a bridge project. The project has a 60% chance of generating $400,000 profit and a 40% chance of $200,000 loss. The contractor estimates that it will cost $5,000 to prepare the bid for the 1st option. The second project is a design and build scheme for a new pumping station at a waterworks. Calculations show that the 2nd option has 90% chance of potential profit $220,000, but a 10% chance of a $100,000 loss. There shall be $20,000 bidding cost for the 2nd option. The third project is a management contract for a building project. The project has a 95% chance of generating $180,000 profit and a 5% chance of a $20,000 loss. Cost of bidding for the 3rd option is $10,000. Which option is the most profitable? Show your calculations by drawing a decision tree. EMV=Probability x Impacts
Question 2 (10 points)
A technology company must decide whether to bid for a government contract to develop a piece of equipment, and if the company decides to bid, it must decide how much to bid. The government will award the contract to the low bidder. However, there is 20% probability that there will not be any other bidders. If there are other bidders, there is a 20% chance of underbid competitors if the bid price is $160K; 60% chance of underbid competitors if the bid price is $170K; and 90% chance of underbid competitors if the bid price is $180K. The company estimates that the cost of placing a bid is $7.5K and the cost of developing the equipment, given that it wins the contract, is $150K. So, for example, if the company bids $170K and wins the bid, its profit will be $20K less the cost of placing the bid.
Show your calculations by drawing a decision tree. EMV=Probability x Impacts
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