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Decision Tree - Project Bidding

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I need assistance setting up a decision tree in excel.

Your employer wants you to bid on a project with an important client. The revenue from this project is important for the company's bottom-line this year.
Estimates show that if you bid $4 million, there is a 30% chance you'll win the bid. If you bid $5 million, there is a 40% chance you'll win the bid. If you bid $8 millions there's an 80% chance you'll win the bid.

Due to Federal Regulatory Compliance required for the project there's only a 60% chance that the client can pursue the project this year after all the bids are in. If the client can not pursue the project this year, then the project must be put on hold. The bid for the work with the client is a sealed bid. If you lose the bid there is no monetary loss. If you win the bid and the client is able to pursue the project, then your company can make $10 million this year. However, if you win the bid and the client is unable to pursue the project, then the you can earn $3 million on working a back-up project.

a. Develop a decision tree for this problem.
b. What is optimal decision?
c. What is the EMV for the optimal decision?

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Solution Summary

The solution comprises of a Decision Tree in EXCEL and the subsequent calculations and analysis leading to the optimal decision.

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Problem:
Your employer wants you to bid on a project with an important client. The revenue from this project is important for the company's bottom-line this year.
Estimates show that if you bid $4 million, there is a 30% chance you'll win the bid. If you bid $5 million, there is a 40% chance you'll win the bid. If you bid $8 ...

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Anwesha Ghosh, MSc
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  • MSc, Osmania University
  • MSc, Indian Institute of Technology - Roorkee (I.I.T.-ROORKEE)
  • BSc, Banaras Hindu University
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