A consulting firm has an option to bid on a contract that will yield $500,000 profit if it is awarded the contract. However, if the firm decides to bid on the contract and it is not awarded to the firm, it will incur a net loss of $125,000 due to the personnel cost involved in developing the contract proposal and profits lost from alternative consulting efforts. The firm does not have sufficient capacity to undertake the contract and the alternative efforts simultaneously. The alternative consulting jobs are certain to yield $75,000 in profit. The chance of obtaining the contract has been assessed at 0.3.
a) Should the company bid on the contract?
b) During a marketing visit a positive indication was obtained. in the past this has resulted in improving the chance of receiving the contract to 0.6. Does this change your decision in part (a)?
c) What is the expected value of perfect information?
SUBSTANTIATE YOUR ANSWERS WITH CALCULATIONS. Hint: Bayes Theorem.
Calculates Expected Value of Perfect Information.