Problem
In the Texaco-Pennzoil case, what is EVPI if Liedtke can learn both Texaco's reaction and the final court decision before he makes up his mind about the current $2 billion offer? (Your answer should be more than the sum of the EVPIs for Texaco's reaction and the court decision calculated separately in Problem 12.12.) Can you explain why the interaction of the two bits of information should have this effect?
Problem 12.12
Consider the Texaco-Pennzoil example.
a. What is EVPI to Hugh Liedtke regarding Texaco's reaction to a counteroffer of $5 billion? Can you explain this result intuitively?
b. The timing of information acquisition may make a difference.
(i) For example, suppose that Liedtke could obtain information about the final court decision before making his current decision (take the $2 billion or counteroffer $5 billion). What would be EVPI of this information?
(ii) Suppose that Liedtke knew he would be able to obtain perfect information only after he has made his current decision but before he would have to respond to a potential Texaco counteroffer of $3 billion. What would be EVPI in this case?
c. In part b, EVPI for (ii) should be less than EVPI calculated in (i). Can you explain why? (Incidentally, if your results disagree with this, you should check your calculations!)
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.