Question

. A construction company wants to submit a bid for remodeling a school. The research and planning needed to make the bid cost $4000. If the bid were accepted, the company would make $26,000. Would you advise the company to spend the $4000 if the bid has only 20% probability of being accepted? Explain your reasoning.

Answer 1

This project has a positive Expected Monetary Value, so it is expected to make money. This means that the company should be advised to make the bid.

Explanation:

We have to find the expected monetary value of this project.

If it is positive, the company should make the bid. Otherwise, they should not make the bid.

There is a 20% probability of the bid being accepted. If the bid is accepted, the company would make $26,000 and lose $4,000. So the expected net earning is $26,000-$4,000 = $22,000.

There is an 80% probability of the bid being rejected. In this case, the company loses $4,000.

The Expected Monetary Value of the project is:

`EMV = 0.2(22,000) + 0.8(-4,000) = $1,200`.

This project has a positive Expected Monetary Value, so it is expected to make money. This means that the company should be advised to make the bid.