Page 9 - CIMA OCS Workbook February 2019 - Day 1 Suggested Solutions

SUGGESTED SOLUTIONS

EXERCISE 4(A) – KEY RISKS

Question Your response

Identify four significant areas Domestic market in maturity so only real growth opportunities
of risk for Trigg Adventure. are in commercial. Anything that compromises the ability to win
commercial contracts would thus be considered significant: –

• A safety accident on Trigg equipment that generated bad
publicity
• Risk of someone on the installation team having a criminal
record that hasn’t been picked up before
• Bad publicity re sustainability / green credentials – e.g. if it
were discovered that some woods used are not from
renewable sources

Other significant risks could relate to sales channels.

• For example, 50% of domestic sales come via the website,
so the risk of the website crashing or being hacked would
have a major impact.

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 F$25,000 being incurred. This is not very
material in terms of Trigg’s overall 2018 profits of F$1m, 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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