TOPIC: Decision Analysis - Constructing Decision Tree.

• Use the information below to design and implement a decision tree
• Interpret the tree to determine the best course of action and answer the questions
• It is recommended that you sketch your tree on scratch paper before creating the decision tree in Excel.
• For the following question, use a blank Excel worksheet and label clearly.
• Format all monetary inputs as currency with no decimals.

You run a contract research organization (CRO) and rely heavily on government contracts for your revenue. A new request for proposals (RFP) just came out to evaluate North Carolina's school nutrition program that would leverage your company's expertise in program evaluation. The state will take bids now from a limited number of organizations (including yours) and open the bidding again in 6 months once the background data on the nutrition program is available. You must choose between bidding now or waiting 6 months then deciding what to do.

If you bid now, it will cost your organization $25,000 in resources just to prepare the proposal. Once submitted, you have a 15% chance of winning the full contract, a 30% chance of winning a subcontract, and a 55% chance of losing the bid.

If you wait 6 months you can decide to either bid on the project or forego bidding altogether. Since you will have more information to rely on at that time, preparing the proposal after 6 months will only cost your organization $5,000. However, due to increased competition, your chances of winning the full contract after 6 months are lower (10%), while your chances of winning the subcontract are slightly higher (35%). The chance of losing the bid remains 55% at that time.

Regardless of when you bid, winning the full contract results in $450,000 awarded to your organization from the state, and winning the subcontract results in $95,000 awarded to your organization from the state. Losing the bid results in no award ($0). You must build a decision tree to help make a good decision. Although this may look like a one-time decision, we will assume your organization must make similar decisions repeatedly over time under similar conditions.

a. How many decision nodes are there in this problem?

b . How many terminal nodes are there in this problem?

c. How many event nodes are there in this problem?

d. What value would a payoff matrix indicate based on bidding now and winning the subcontract?

e. What is the expected monetary value of bidding now?

f. If you choose to wait 6 months, what is the expected monetary value of deciding to forego bidding altogether?

g. What is the expected monetary value of waiting 6 months then bidding?

h. What dollar value (in terms of absolute EMV) separates the decision to bid now from the decision to wait 6 months?

i. Which course of action should be taken based on the results of the decision tree? Include relevant information from your tree. Briefly describe a situation for this problem when you would decide to act against what the decision tree is telling you to do.