The Extron Oil Company is considering making a bid for a shale oil development contract to be awarded by the federal 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 subcontract the processing out 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 $2,000,000. 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 decision situation and determine whether the company should make abid.

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