A freight company has to transport a container by road from Amsterdam to Tabriz. There are two routes that are viable. Route A is longer but less dangerous than Route B. If the container reaches its destination successfully the company will receive a fee of €15,000. Fuel and other direct costs incurred amount to €6000 on Route A and €4500 on Route B. The probability that the container is hijacked on Route A is put at 0.2; on Route B it is estimated to be 0.5. If the container is hijacked the company will receive no fee but anticipates it will only have to meet twothirds of the fuel and other direct costs. The company will not be insuring the container because of the prohibitive cost of cargo insurance for such a journey.
(a) Draw a decision tree to represent the situation the company faces.
(b) Calculate the Expected Monetary Value for each route and use these to advise the company which route they should take.
(c) There are reports of armed incursions across a border at a critical point on Route A. As a result, the probability of the container being hijacked on Route A must be revised to 0.4. Explain what effect, if any, this has on the advice you gave in your answer to (b).