The Extron Oil Company is considering making a bid for a shale oil development contract to be awarded by the provincial government. The company has decided to bid $110 million. The company estimates that it has a 60% chance of winning the contract with this bid. If the firm wins the contract, it can choose one of three methods for getting the oil from the shale: It can develop a new method for oil extraction, use an existing (inefficient) process, or subcon-tract out the processing to a number of smaller companies once the shale has been excavated. The results from these alternatives are given as follows.

The cost of preparing the contract proposal is $2 million. 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 situation and determine whether the company should make a bid.

Develop New Process Probability Profit (millions) Outcomes $600 Great success 0.30 Moderate success 0.60 300 Failure 0.10 -100 Use Present Process Outcomes Probability Profit (millions) $300 Great success 0.50 Moderate success 0.30 200 Failure 0.20 -40 Subcontract Probability Profit (millions) Outcomes Moderate success 1.00 $250