Corecast Contractors has been requested by a municipality to submit a proposal bid for a parking garage contract. In the past, the cost of preparing bids has been about 2 percent of the cost of the job. Corecast project manager Bradford Pitts is considering three possible bids: cost plus 10 percent, cost plus 20 percent, and cost plus 30 percent. Of course, increasing the “plus percent” increases the project price and decreases the likelihood of winning the job. Bradford estimates the likelihood of winning the job as follows:
P1: C+0.1C=1.1C P(win)=.6 P(lose)=.4
P2: C+0.2= 1.2C P(win)=.4 P(lose)=.6
P3: C+0.3=1.3C P(win)=.2 P(lose)=.8
In all cases, the profit (if the bid is won) will be the bid price minus the proposal preparation cost, or 0.02C; the loss (bid is not won) will be the proposal preparation cost. Prepare a decision tree for the three options. If Bradford uses the maximum expected profit as the criterion, which bid proposal would he select?