Decision Analysis

Del-Jen Inc. a company that provides operations and maintenance for buildings, utilities, vehicles, and housing, has decided to make a bid on a government contract to supply engineering, environmental management, housing management, emergency management, supply, grounds maintenance, and custodial services to a military installation in the US for a five year period.  The bids must be sealed so that no company knows what the other is bidding and the lowest bid wins the contract. Del-Jen estimates that it will cost $5,000 to prepare the bid and $95,000,000 in costs to provide the services if it wins the contract. On the basis of past contracts of this type, Del-Jen believes that the possible low bids from the competition, if there is any competition, and the associated probabilities are those shown in the table below. In addition, Del-Jen believes there is a 30% chance that there will be no competing bids.

1. Create a Payoff Table for this bid. Show the monetary payoff matrix for each combination of Del-Jen’s bid and a competitors bid. (Note: include a no bid option)

2. Next create an alternative Payoff Table showing Del-Jen’s possible bids and the monetary value to Del-Jen if it wins and if it loses the bid. Include as a separate column in the table (last column) the probability that Del-Jen will win associated with each bid alternative.

3. Finally, calculate the Expected Monetary Value (EMV) for each of Del-Jen’s alternative bid strategies using the information in the alternative Payoff Table.

4. Using the information above (answers to 1, 2 & 3) create a decision tree that illustrates the optimal decision.