If you decide to put the younger two together, make sure it is discussed as a treat for the younger one. You can tell the older one privately that you want her to have her privacy since she is older, etc. Then tell the younger one secretly (in her eyes) that she is the lucky one that GETS to have the baby in her room. You can tell her that since she is younger, she will be able to understand what the baby needs, or that she will remember more what it was like to be a baby, etc. It is important how you "sell" this as girls can have such emotional reactions to change.
In both cases, you need both of the girls to feel needed. Find jobs for them to do that fit their personality and gifts that show how important they are with a new baby. Ask their opinion often (even when you don't need it) so they feel valued. It's hard to have a cute, needy baby come into their home and disrupt their lives.
Decorating is easy because the baby will not know or care. Let the one who will share decide how to decorate. Then it will feel more like her room. You can ask her what you think the baby would want, but it is more important for the room to be decorated the way she would want it. To make sure your older daughter doesn't feel left out, be sure to ask her if there is anything she would like to change about her room (within reason). Be sensitive to anything that appears to minimize the girls' needs.