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Probability Distribution - E-mail Potential Acquisition

E-mail Potential Acquisition

You've done a great job so far, but we need you to investigate another situation. BankTen is considering an acquisition and has narrowed the possibilities to three companies. All three of these acquisitions are ongoing businesses with a profit stream and can be acquired for about the same amount of capital.

Each of these acquisitions is similar from a strategic perspective for the bank and needs to be evaluated purely from a profit perspective. BankTen can only invest in one of these acquisitions. The vice president of finance is extremely concerned about the immediate impact on the profit for the next quarter and would like to invest in the venture that presents the least risk in the next quarter. The vice president of business development, however, wants to take a longer-term approach and invest in an acquisition that will help the profits of the bank over the next 10 years.

I'd like you to summarize the profit opportunities for each of the three companies. The information on profits is included below:

Data from the investment banking division

After analyzing the data for the past five years and examining the trends in the industry, we have calculated the quarterly profits for each of the potential acquisitions. Because of the sensitive nature of the information, we will only refer to these as company A, B, and C. The results have been summarized below.

The quarterly profit from company A is expected to behave like a normal distribution with a mean of $680,000 and standard deviation of $50,000.
The quarterly profit from company B is expected to behave like a uniform distribution between $500,000 and $900,000.
The quarterly profit from company C is expected to behave like an exponential distribution with a mean of $750,000.

You should also address the concerns from the vice presidents of finance and business development - which company would fit their criteria best? Finally, make a recommendation on which company you think the bank should acquire. Please be sure to provide your rationale!


Solution Preview

Please see the attached file.

Company A

Pros : has the least variance
You are almost certain (probability > 99.98%) to make more than 500,000. The detail probability is shown in ...