Page 270 - RISK Management IC 86

would equate the present value of the net cash inflow with the amount
of the investment. If this discount rate is less than the firm’s cost of
capital or some other desired minimum return, the investment is not
worthwhile. If the discount, rate equals or exceeds this desired
minimum return, the investment maybe worthwhile but its internal
rate of return must be compared with the corresponding return on
other possible investments.

Loss Matrix : A listing of the rupee losses associated with each
possible risk management tool and each possible outcome. For
example, a decision to retain would produce a loss of Rs. 10,000 if a
Rs. 10,000 loss occurs. A decision to purchase complete insurance
would produce a ‘loss’ of the insurance premium no matter what the
outcome may be. The original loss matrix should be converted to an
after-tax basis and extended to include the intangible costs (worry
caused by short-run uncertainty) as well as the tangible rupees losses.

Worry method : A variation of the expected tangible loss method that
directs the risk managers to select the tool that would minimize the
average tangible rupee outlay in the long run plus the value that the
risk manager assigns to any worry caused by the short-turn
uncertainty, if any, that remains.

Risk identification :
The process of identifying the exposures to potential property, liability
or personnel losses.

Risk identification, checklist : A listing of all the loss exposures that
might possibly exist.

Financial statement method : The use of financial statements,
together with a checklist, to identify the exposures of a particular
business.

Flow chart method : The use of flow charts, together with a checklist,
to identify the exposures of a particular business.

Probability distributions : Theoretical probability distributions for
which a formula has been developed based on some assumptions
about the behavior of the variable. Useful distributions in risk
management are the Poisson distribution, the normal distributions,
the log-normal distribution, and others.

Probability distribution of total rupee losses per year : A listing of
all the total rupee losses that might occur in a year and the
probabilities of each possible total rupee amount. The two component
probability distribution are the probability distribution of (i) the
number of occurrences, and (ii) the rupee loss per occurrences.

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