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Sheet 3 Decision Tree
Sheet 3 Decision Tree
Project Management
Decision analysis / tree
Question # (1)
The ABC Construction company was awarded a contract for the construction of an
advanced and complex facility. Due to the complexity of this project, the company
can choose one the following three options: (1) invest in new equipment and
technology; (2) use current equipment and technology; or (3) subcontract the complex
portions to other specialty contractors. The expected results from these three
alternatives are summarized in the following Table.
2 Use current
1 Invest in new 3 Subcontract
technology
technology
Outcomes
probability Profit probability Profit probability Profit
($millions) ($millions) ($millions)
Great
0.30 $600 0.50 $300 0.00 NA
success
Moderate
0.60 $300 0.30 $200 1.00 $250
success
Failure 0.10 -$100 0.20 -$40 0.00 NA*
* NA = not available
The cost of preparing the bid is estimated at $2million. If the company does not make
a bid, it will invest in an alternative venture with a guaranteed profit $30 million.
Perform the necessary decision analysis to advice the construction company on the
best decision(s) to make for this problem.
Table 2E 10.1
profit Table for Carlisle’s Decision Problem
Decision/Market Market Market Market
Outcome Expands Stable Contracts
Construct a new plant 400,000 −100,000 −200,000
Expand existing plant 250,000 −50,000 −75,000
Do nothing 50,000 0 −30,000
b) High bid :
$2,000,000 → 0.3
$1,000,000 → 0.6
-$400,000 → 0.1
For Dam project:
a) High bid:
$800,000 → 0.2
$400,000 → 0.5
-$200,000 → 0.3
b) Low bid :
$500,000 → 0.3
$100,000 → 0.5
-$400,000 → 0.2
Help the contractor to choose the best decision about his bidding strategy using
decision tree technique.