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Explanation: It has been given in this question that M/S James claims a coverage of 55% and the probability of this being true is 0.7.
Choice 3:
Give the contract to M/s James for one year and based on the performance, renew the contract with him for the next 4 years or give M/S Jagan the contract for the next 4 years. Let us assume that M/S James retains the contract for all 5 years. Rajat will renew the contract only if M/S Jame's claim that their market reach is 55% is true. The probability of the claim being true is 0.7.
Therefore, the EV of return if M/S James bags the contract for all 5 years = 0.7*0.55*(5+15) = Rs. 7.7 crores. Let us assume that M/S James's claim is false. The probability of the claim being false is 1-0.7 = 0.3. Now, if the claim is false, Rajat will terminate the contract by the end of the year and will partner with M/S Jagan for the next 4 years. Also, we have historic data that M/S James reaches 25% of the customers. Even if the claim is false, the laptops will reach 25% of the customers in the first year and 55% of the customers from the second year (Since M/S Jagan will bag the contract).
Therefore, the EV of profit in this case is 0.3*0.25*5+0.3*0.55*15 = 0.375 + 2.475 = Rs.2.85 crores. Therefore, the total EV if M/S Bola bags the contract the first year is 7.7+2.85 = Rs.10.55 crores. EV of choice 1 = Rs. 11 crores
EV of choice 2 = Rs. 11.3 crores
EV of choice 3 = Rs. 10.55 crores
Arranging the choices by EV, we get, Choice 2 > Choice 1 > Choice 3.
Choice 2 is more profitable than choice 3. Therefore, option B is true and hence, option B is the right answer.