Page 9 - CIMA MCS Workbook August 2018 - Day 1 Suggested Solutions

SUGGESTED SOLUTIONS

4 RISK AND UNCERTAINTY

EXERCISE 4(A) – KEY RISKS

Question Your response

Identify four significant areas • Increased competitive pressure from rivals – especially
of risk for GymFiT. Gym4ALL
• Failure of IT systems - membership enrolment, account
management, payment processing, gym access and
customer communications are all dependant on the
successful operation of information systems
• Breach of data security - unauthorised access or loss of
information could lead to legal claims, disruption to
operations and reputational damage.
• Health and safety - serious injury to a member whilst no
staff present results in litigation/loss of reputation
• Gym membership is discretionary (non-essential) spending,
so overall demand may be heavily influenced by the state of
the economy.

EXERCISE 4(B) – USING EXPECTED VALUES

• EV = 0.6 × 50 + 0.3 × 12 - 0.1 × 25 = + 31 > 0
• Using EV, this would suggest the project is acceptable as the EV is positive.
• However
o There is a 10% chance of a loss of C$25,000 being incurred. This is not very
material in terms of GymFiT’s overall 2017 profits of C$6.3m, but the Board
may still be reluctant to take such a risk
• Concerns over usefulness of EVs
o EV is a long run average when the project is a one-off decision
o EV cannot happen
o Difficult to estimate probabilities with any certainty
o EV ignores risk profile (see above).

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