Reference no: EM131710365

Question: What is the expected value of perfect information about the success or failure of the merger in problem?

Problem: A company is considering merging with a smaller firm in a related industry. The company's chief executive officer believes that the merger has a 0.55 probability of success. If the merger is successful, the company stands to gain in the next 2 years $5 million with probability 0.2; $6 million with probability 0.3; $7 million with probability 0.3; and $8 million with probability 0.2. If the attempted merger should fail, the company stands to lose $2 million (due to loss of public goodwill) over the next 2 years with probability 0.5 and to lose $3 million over this period with probability 0.5. Should the merger be attempted? Explain.