Perfect information regarding matthew potential for success

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Reference no: EM132249714

An executive search for a VP of Information processing is being conducted for Western Bank by Headhunters Inc. Headhunters feels it has found just the right person, Matthew Fenton who has an excellent record at a similar mid-sized bank.

After a round of interviews, Western’s president believes that Matthew has a probability of 0.7 of success at their bank. If Matthew is successful, the company will realize a profit of $2 million (net of Matthew’s salary, training, recruiting costs, and expenses). If he is not successful, the company will realize a net loss of $600,000.

a. Should Western hire Matthew?

b. What is the most Western should spend on getting perfect information regarding Matthew’s potential for success?

For an additional fee of $40,000, Headhunters will provide a detailed investigative process that will further pinpoint Matthew’s potential for success. This process has been found to be 90 percent reliable, that is, a candidate who would be successful will pass the test with probability 0.9, and a candidate who would be unsuccessful will fail the test with probability 0.9.

c. If Headhunter’s investigative process indicates Matthew will be successful, what is the probability he will be actually successful?

d. What is the probability that Matthew will be successful even if the investigative process indicates Matthew will fail?

e. Should Western use investigative process for $40,000? What is the most they should be willing to pay for it?

Draw a decision tree for each of these three problems and if necessary for their sub-parts.

Clearly show all probabilities, payoffs, costs, and EMVs.

Clearly show the optimal decision.

Reference no: EM132249714

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