Question

5-8. Your company has proposed to produce a component for an automobile plant, but it will not have a decision from that plant for six months. You estimate the possible future states and their probabilities as follows: Receive full contract (N1, with probability p1=0.3); receive partial contract (N2,p2=0.2); and lose award (no contract) (N3,p3=0.5); Any tooling you use on the contract must be ordered now. If your alternatives and their outcomes (in thousands of dollars) are as shown in the following table, what should be your decision?

	N1	N2	N3
A1 (Full tooling)	+800	+400	−400
A2 (Minimum tooling)	+500	+150	−100
A3 (No tooling)	−400	−100	0

Answer 1