1.
Compute inherent risk.
1.
Answer to Problem 20BEA
Inherent risk is $24,000,000.
Explanation of Solution
Inherent Risk:
Inherent risk is a risk that prevails in a system before any control measure is adopted within an organization.
Computation of inherent risk:
Inherent risk can be computed by using the following formula:
Substitute $80,000,000 for impact and 30% for the probability of occurrence in the above formula.
Therefore, inherent risk is $24,000,000.
2.
Compute residual risk of each of the three alternatives.
2.
Answer to Problem 20BEA
Residual risk for alternative A, B, and C is $16,000,000, $7,500,000, and $24,000,000 respectively.
Explanation of Solution
Residual risk can be computed by using the following formula:
Computation of residual risk for alternative A:
Substitute $80,000,000 for impact and 20% for the probability of occurrence in the above formula.
Computation of residual risk for alternative B:
Substitute $50,000,000 for impact and 15% for the probability of occurrence in the above formula.
Computation of residual risk for alternative C:
Substitute $80,000,000 for impact and 30% for the probability of occurrence in the above formula.
Therefore, residual risk for alternative A, B, and C is $16,000,000, $7,500,000, and $24,000,000 respectively.
3.
Compute benefit from each of the three alternatives.
3.
Answer to Problem 20BEA
Benefitfrom alternatives A, B, and C is $8,000,000, $16,500,000, and $0 respectively.
Explanation of Solution
Benefit from a risk response alternative can be computed by using the following formula:
Computation of response benefit from alternative A:
Substitute $24,000,000 for inherent risk and $16,000,000 for residual risk in the above formula.
Computation of response benefit from alternative B:
Substitute $24,000,000 for inherent risk and $7,500,000 for residual risk in the above formula.
Computation of response benefit from alternative C:
Substitute $24,000,000 for inherent risk and $24,000,000 for residual risk in the above formula.
Therefore, benefit from alternatives A, B, and C is $8,000,000, $16,500,000, and $0 respectively.
4.
Compute net benefit from each of the three alternatives.
4.
Answer to Problem 20BEA
Net benefit from alternatives A, B, and C is $5,000,000, $3,500,000, and $0 respectively.
Explanation of Solution
Net benefit from a risk response alternative can be computed by using the following formula:
Computation of net benefit from alternative A:
Substitute $8,000,000 for response benefit and $3,000,000 for response cost in the above formula:
Computation of net benefit from alternative B:
Substitute $16,500,000 for response benefit and $13,000,000 for response cost in the above formula:
Computation of net benefit from alternative C:
Substitute $0 for response benefit and $0 for response cost in the above formula:
Therefore, net benefit from alternatives A, B, and C is $5,000,000, $3,500,000, and $0 respectively.
5.
Identify the alternative which would be adopted by the company.
5.
Explanation of Solution
Alternative A would be chosen by the company since; net benefit is highest in case of alternative A.
Want to see more full solutions like this?
Chapter 13 Solutions
Managerial Accounting: The Cornerstone of Business Decision-Making
- Crazy Fan Guard Company provides security services to popular live sporting event venues. Crazy Fan management has identified one of its top risks as the possibility that restrictions on premium close seating options will severely decrease its sales revenue by lessening the demand for its security services. The table below displays a description of this top risk, an inherent risk assessment, three risk response alternatives, and finally, a residual risk assessment. Crazy Fan Guards management accounting team estimates that the incremental cost of implementing response A is 2,200,000, and the incremental cost of implementing response B is 700,000. Required: 1. Calculate the benefit of each risk response alternative A through C. 2. Calculate the net benefit of each risk alternative A through C. 3. CONCEPTUAL CONNECTION Using net benefit as the criterion, explain the best risk response alternative that Crazy Fan Guard Company management should implement.arrow_forwardSubject: accounarrow_forwardThe probabilities for the states of nature are P(8₁) = 0.20, P(82) = 0.30, and P(83) = 0.50 . For a consulting fee of $5000, an agency will review the plans for the comedy series and indicate the overall chances of a favorable network reaction to the series. Assume that the agency review will result in a favorable (F) or an unfavorable (U) review and that the following probabilities are relevant: P(F) = 0.69 P(U) = 0.31 P($1F) = 0.09 P(82|F) = 0.26 P(83| F) = 0.65 P($₁|U) = 0.45 P(82|U) = 0.39 P(83|U) = 0.16arrow_forward
- Refer to the XYZ Company example in the chapter and the results in Panels A and B of Exhibit 12.7. On the basis of this information, management of the company has decided to delay the implementation of the project for 1 year. Those managers are now interested in knowing how sensitive this decision is with respect to the assumptions they’ve made regarding the basic analysis. Therefore, they have asked you to prepare some supplementary analyses regarding Panel B of Exhibit 12.7. Required: 1. Holding everything else constant, what is the expected NPV of the decision if the probabilities for the three scenarios are as follows: high (20%), medium (47%), and low (33%)? 2. Holding everything else constant, what is the expected NPV of the decision if the probabilities for the three scenarios are as follows: high (24%), medium (43%), and low (33%)? 3. Prepare a 5 × 3 table containing the estimated NPV of the decision to delay for each combination of the following: risk-free rate of interest…arrow_forwardBarnard Manufacturing is considering three capital investment proposals. At this time, Barnard only has funds available to pursue one of the three investments. |(Click the icon to review the proposals.) Which investment should Barnard pursue at this time? Why? Since each investment requires a different initial investment and presents a positive NPV, Barnard Manufacturing should use the profitability index to compare the profitability of each investment. Select the labels for the evaluation measure you determined above. Enter the amounts into the formula, beginning with Equipment A, and calculate the amount you will use to evaluate each investment. (Enter all amounts as positive numbers. Round the evaluation measure to two decimal places, X.XX.) - X Data Table Equipment A Equipment B Equipment C Present value of net cash inflows 1,832,478 S 1,865,471 $ 2,169,724 (1,650,881) (1,516,643) (1,749,777) Initial Investment 181,597 S 348,828 S 419,947 NPV Print Donearrow_forwardThe auditor worked for this client for years. But before accepting or continuing with the client, What are the reasons the auditor or audit firm should or should not retain this existing client this time around using the information below about the client? What risks could the client, its business, and its environment pose to the auditor or audit firm? The client: Although client cash flows have been stable, the disruption caused by the 2020 global pandemic made it difficult for retail lessors to pay their rent on time. Due to the company's tenant-friendly approach, retail clients were allowed to renegotiate their lease and temporarily pause rent payments between June 2020 and July 2021, shifting those payments to the last 12 months. Most of these leases will expire in the next two years, including all retail companies unable to pay their rent. However, they estimate that they will receive all the lost cash flow from these tenants within a couple of years. Currently, the company is a…arrow_forward
- Taking into consideration all the information given, determine the Net Present Value of the project and advice the company on whether to invest in the new line of product.Please use the attached images to determine the problem above.arrow_forwardBriefly review the sensitivity analysis that is presented in the case exhibits. Under what circumstances is this project financially attractive? What bets were the company making when they went ahead with the project? DO NOT HAVE TO PERFORM YOUR OWN SENSITIVITY ANALYSIS. YOU ARE TO INTERPRET THE SENSITIVITY ANALYSIS THAT IS GIVEN.arrow_forwardnot use ai pleasearrow_forward
- Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.arrow_forward. Refresh Resorts, Inc., operates health spas in Key West, Florida; Phoenix, Arizona; and Carmel, California. The Key West spa was the company’s first and opened in 1991. The Phoenix spa opened in 2004, and the Carmel spa opened in 2013. Refresh Resorts has previously evaluated divisions based on RI, but the company is considering changing to an EVA approach. All spas are assumed to face similar risks. Data for 2017 are: Q. Why might Refresh Resorts want to use EVA instead of RI for evaluating the performance of the three spas?arrow_forwardXYZ Co. hires a financial consultant to help evaluate whether or not to launch a new line of perfumed shark attractants. The consultant charges a fee of $10,000, half of which must be paid up-front and half to be paid when the project evaluation is completed. The consultant’s fees can be considered a/an _______ of the project. Select one: a. financing cost b. sunk cost c. opportunity cost d. side effect e. cash outflowarrow_forward
- Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage LearningEssentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage LearningEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
- Excel Applications for Accounting PrinciplesAccountingISBN:9781111581565Author:Gaylord N. SmithPublisher:Cengage LearningIntermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning