June 2012 Part B Q5

tanbc

A construction company has a RM1 million construction contract to complete a building by the middle of 2012, but is experiencing delays due to the complex design. The managers have to make a decision on whether to continue as at present or to employ specialist engineering consultants at a cost of RM 200 000.
If the company continues as at present, it estimates there is only a 30% chance of completing the building on time, and that the delay could be, one, two or three months, with equal probability. If the building is late, there are penalties of RM 100 000 for each month’s delay or part of a month. The managers believe that if they employ specialist engineering consultants, their chances of completing the contract on time will be trebled.
But if the building is still late, it would be only one or two months late, with equal probability.



(a) Draw a decision tree diagram to represent this decision problem, using squares for decision points, circles for random outcomes and including probabilities, revenues and penalties;        

(b) Analyse the tree using the expected value techniques

(c) based on the part(b), recommend to the managers the most appropriate decision to be made

tanbc

Answer: