ISE 562; Dr. Smith
Decision Theory
Decision Theory Americo Case Solution
ISE 562; Dr. Smith
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• Example: Americo Oil is considering making a bid of $110M for shale oil development. The company estimates it has a 60% chance of winning the contract. If it wins, it can choose one of 3 methods of oil extraction: 1) new method; 2) use exising ineff. process; 3) subcontract to smaller companies. Data are summarized in the following table. Cost of the contract proposal is $2M; If company doesn’t bid, will invest with a return guaranteed to be $30M. Construct the decision tree and identify the correct decision.
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ISE 562; Dr. Smith
Develop new process
Probability
Profit ($M)
Great success
Use existing (ineff.) process
Great success
Subcontract
Moderate 1.0 250
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ISE 562; Dr. Profit = Profit – Bid Cost
0.3 Great Success
0.6 Moderate
0.1 Failure
0.5 Great Success
0.2 Failure
1 Moderate
0.6 Win Contract
0.4 Don’t win
0.3 Moderate
Use Existing Process
Subcontract
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