PROJECT RISK MANAGEMENT

1 EDINBURGH NAPIER UNIVERSITY SCHOOL OF ENGINEERING & BUILT ENVIRONMENTASSIGNMENT: PROJECT RISK ANALYSISBSV11105 PROJECT RISK MANAGEMENT [Issued 11th February 2019]________________________________________________________________________Question One IntroductionA group of medical professionals (doctors, dentists, physiotherapists etc) isconsidering building a private hospital in a remote part of South America. If medicaldemand is high (i.e. if there is a favourable market for the hospitals services), thegroup could make a profit of 13m.If the market is not favourable, they could lose 6m.A market of medium favourability should provide a profit of 6m.The group have the optiomn to not proceed at all [in which case there is no cost].In the absence of any market data, the best the group can estimate is that there isa 50: 10: 40 chance that the hospital will be successful (i.e. 50:10:40 probability ofa :favourable market, medium favourability, not favourable). (a) Draw a decision tree that describes the above decision problem and advise thegroup on the optimal decision.(12 marks)The same group of medical professionals, have been quoted a fee of 90,000 by abusiness planning organisation to undertake a market research study. Theorganisation claims their experience has enabled them to use Bayes theory to makestatements of probability. These are the twelve statements:1. The market will be favourable = 0.402. The market will be of medium favourability = 0.303. The market will be unfavourable = 0.304. A favourable market will result from a favourable study = 0.855. A medium favourability market will result from a favourable study = 0.106. An unfavourable market will result from a favourable study = 0.057. A favourable market will result from a medium favourable study = 0.208. A medium favourability market will result from a medium favourable study = 0.609. An unfavourable market will result from a medium favourable study = 0.2010. A favourable market will result from an unfavourable study = 0.1011. A medium favourability market will result from an unfavourable study = 0.2012. An unfavourable market will result from an unfavourable study = 0.70(b) Develop a new decision tree for the medical professionals to reflect the optionsnow open with the market study.(12 marks)2(c) Use the Expected Monetary Value (EMV) approach and recommend an optimalstrategy. (please calculate monetary figures to 2 decimal places)(12 marks)(d) List a number of potential construction and operational risks that the groupshould consider given the proposed hospital is located in a remote area abroad.(6 marks)(e) With reference to the diagram below (see Lecture 1); provide further details of[a] one of the risks given as a Project risk- and [b] one of the risks given as anInternal risk (8 marks)3__________________________________________________________________Question TwoA US local authority owns a tramway system; and the tram operators are underpressure to increase passenger numbers. They have to make a decision on whetherto lower fares in an attempt to increase passenger numbers.If they decide to reduce fares they will then have to decide whether to launch a radioadvertising campaign to increase awareness of the fare reduction.If fares remain the same then it is estimated that there is a 0.7 probability that the meannumber of passengers carried per day over the next year will equal 20 000. In addition,a 0.3 probability that the number will fall to 15 000.The annual profits associated with these passenger numbers are estimated to be$3million and $1million, respectively.If the fares are reduced, but radio advertising is not used, then it is thought that thereis a 0.6 probability that the mean number of passengers carried will increase to 25 000.In addition, a 0.4 probability that the number will increase to 22 000. The resultingprofits generated by these passenger numbers are estimated to be $2million and $1.7million, respectively.Radio advertising of the fare reduction would further the probability of an increase to amean of 25 000 passengers to 0.8; and reduce the probability that the mean will be 22000 to 0.2. However, it would reduce the profits associated with these mean passengernumbers by $0.6 million. The tram operating companys objectives are to [A] maximisepassenger numbers and [B] maximise profit. Note Objective [A] is present as the local authority wantto introduce social & environmental benefits {e.g. more people walking, improved air quality, reduced traffic congestion}.(a) Utility functions for the mean numbers of passengers carried and the profithave been obtained from the trams operators Chief Executive Officer (CEO),as below. Mean number of passengers Utility15 000 0.0016 200 0.2017 500 0.4019 000 0.6020 000 0.8022 000 0.9525 000 1.00 Profit ($ million) Utility1.0 0.001.1 0.201.3 0.551.4 0.601.7 0.752.0 0.902.5 0.953.0 1.00 4Discuss how utility functions can be determined in practice.Plot the above utility functions and provide an interpretation of the plots. (12 marks)(b) The elicitation session revealed that, for the CEO, mean number ofpassengers and profit are mutually utility independent. You are reminded that,in this case, a two-attribute utility function can be obtained from:u(x1, x2) = k1u(x1) + k2u(x2) + k3u(x1)u(x2)Where k3 = 1 k1 k2The elicitation session also revealed that k1 =0.9 and k2 = 0.6, where theattribute number 1 is the mean number of passengers.Given the above utilities, [i] determine the policy that the tramway shouldundertake; and [ii] comment on your answer.(30 marks)(c) Provide details (including making reference to the construction industry) of twoof the following: Risk retention Risk avoidance Risk transfer Risk reduction(8 marks)5Total Marks for Questions One and Two: 1006

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