Cliff Branch’s firm was trying to decide if it should submit a proposal for Project 1, Project 2, both projects, or neither project. Cliff’s firm will win the contract for Project 1, which is estimated to be worth $300,000 in profits with 20 percent probability (p = 0.2). There is an 80 percent probability (P = 0.80) that the firm will not win the contract for Project 1, and the outcome is estimated to be $40,000 in loss. Suppose there is a 20 percent probability that Cliff’s firm will lose $50,000 on Project 2, a 10 percent probability that it will lose $20,000, and a 70 percent probability that it will earn $60,000. Draw a decision tree diagram and calculate the EMV for each project. Write a paragraph explaining which projects Cliff’s firm should bid on. Be sure to use the EMV information and your personal risk tolerance to justify your answer. [Show the details of your work]
Cliff Branch’s firm was trying to decide if it should submit a proposal for Project 1,
Project 2, both projects, or neither project. Cliff’s firm will win the contract for Project 1, which is estimated to be worth $300,000 in profits with 20 percent probability (p = 0.2). There is an 80 percent probability (P = 0.80) that the firm will not win the contract for Project 1, and the outcome is estimated to be $40,000 in loss. Suppose there is a 20 percent probability that Cliff’s firm will lose $50,000 on Project 2, a 10 percent probability that it will lose $20,000, and a 70 percent probability that it will earn $60,000. Draw a decision tree diagram and calculate the EMV for each project. Write a paragraph explaining which projects Cliff’s firm should bid on. Be sure to use the EMV information and your personal risk tolerance to justify your answer. [Show the details of your work]
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