ABC Inc., a company that specializes in computer services has been invited to make a bid on a certain contract. The contract calls for specific number of computers to be delivered during the coming year. As is common, the bid has to be sealed so that no any rival will know what the other is bidding, and the low bid wins the contract.
ABC Inc., estimates that it will cost $5000 to prepare a bid and $95,000 to supply the equipment if it wins the contract. On the basis of the past contracts of this type, ABC Inc., believes that the possible low bids from the competition, if there is any competition, and the associated probabilities are as follows;
• Low Bids (in ‘000)
• Probabilities Less than $115 0.2 •Between $115 and $120 0.4
•Between $120 and $125 0.3
• Greater than $125 0.1
• In addition ABC Inc., believes there is a 30% chance that there will be no competing bids.
Questions:
1. What should ABC Inc., bid to maximize its EMV?
2. Draw a decision/precision tree for the above information If ABC Inc., decide to change all references to $115 to $110 and $125 to $130. What is the best decision and its correspondent EMV? From (i) above, what decision would a maximin decision maker choose? Which decision would a maximax decision maker choose? Would you defend either of these criteria for this particular example?
3. Develop Risk Profile (for each decision)
4. Develop Sensitivity analysis.