ASSIGNMENT – EMRM5103

1

JANUARY SEMESTER 2011

EMRM5103 - PROJECT RISK MANAGEMENT ASSIGNMENT (50%)

ANSWER ALL QUESTIONS

Part A

Question 1 You have been recently appointed as the project manager for a large project. The risk management team for this project has never used quantitaive risk analysis in all of the projects that it has been involved with in the past. Prepare a presentation outlining the advantages and the techniques of quantitative risk analysis to this risk management team with the aim of encouraging its use by this team.

[14 marks] Question 2

a. Identify the key features of the various commercial project management softwares available in the market.

b. Explain in some detail how such softwares enable project risk management.

[14 marks]

Question 3

Your company has asked you to determine the financial risks of manufacturing 6,000 units of a product rather than purchasing them from a vendor at $66.50 per unit. The production line will handle exactly 6,000 units and requires a one-time setup cost of $50,000. The production cost is $60/unit. Your manufacturing personnel inform you that some of the units manufatured by them may be defective, as shown below:

% defective 0 1 2 3 4 Probability of occurrence 0.40 0.30 0.20 0.06 0.04

ASSIGNMENT – EMRM5103

2

On the other hand, the vendor has the following quality assurance:

% defective 0 1 2 Probability of occurrence 0.90 0.085 0.015

Defective items must be removed and replaced at a cost of $145/defective unit. Construct a payoff table, and using the expected-value model, determine the financial risk and whether the make or buy option is best.

[14 marks]

Question 4

Describe the salient aspects of project risk management processes adopted in the PMBOK of the PMI.

[14 marks]

Question 5

a. Discuss the appropriateness, or otherwise, of the following risk measures: i) Likelihood of Loss times Impact of Loss ii) The Expected Monetary Value

b. Identify the various risk exposures in a large project that can be effectively managed

using insurance.

c. You have $1,000,000 worth of equipment at the job site and wish to minimise your risk of direct property damage by taking out an insurance policy. The insurance company provides you with their statistical data as shown below:

Property Damage Type Probability (%) Loss Amount in $ Total 0.02 1,000,000 Medium 0.08 400,000 Low 0.10 200,000 No damage 99.8 0

ASSIGNMENT – EMRM5103

3

Assuming that the insurance company adds on $300 for handling and profit and uses expected value to calculate premiums, calculate:

i) the exected loss and its variance;

ii) the premium the insurer is likely to charge for:

- full cover against any loss - cover against losses in excess of $200,000

[14 marks]

[TOTAL: 70 MARKS]

Part B Question 1 a. Describe how you would use the Monte Carlo Simulation Technique for project risk

management purposes.

b. A construction firm has the following abridged balance sheet:

RM ‘000,000

RM ‘000,000

Assets Net fixed assets 70 Cash and Current assets 30 Total assets 100 Financed By 7% Debentures 30 Equity capital 60 Current liabilities 10 Total capital 100

Its fixed assets are expected to provide a 15% return over the planned investment

horizon. This firm intends to embark on projects that require an initial sinking of RM 30million and

are expected to provide in aggregate a 20% return with a standard deviation of 30% over the planned investment horizon.

These projects are to be financed wholly by the internally available funds and the

debentures are to be redeemed at the end of the planned investment horizon.

ASSIGNMENT – EMRM5103

4

For this firm,

i) evaluate, stating your assumptions, the probability that the firm is financially better off by embarking on the intended projects;

ii) assuming that it is only able to earn actual returns of 12% on its fixed assets and

15% on its projects, derive the projected balance sheet at the end of the planned investment horizon;

iii) assuming that the projects' expected returns are normally distributed, represent

the provided information in suitable mathematical notations;

iv) assuming that the projects' expected returns are normally distributed, derive an expression for the firm’s value at the end of the planned investment horizon; and

v) stating your other relevant assumptions, derive the probability of its ruin brought

about by embarking on these projects.

[TOTAL: 30 MARKS]