17.1 You have $1,000,000 worth of equipment at the job site and wish to minimize your risk of direct property damage by taking out an insurance policy. The insurance company provides you with its statistical data as shown below: Type of Damage Probability (%) Amount of Damage (Loss) (%) Total 0.02 100 Medium 0.08 40 Low 0.10 20 No Damage 99.8 0 If the insurance company uses expected value to calculate premiums, then how much would you expect the premium to be, assuming the insurance company adds on $300 for handling and profit? 17.2 You have been asked to use the expected-value model to assess the risk in developing a new product. Each strategy requires a different sum of money to be invested and produces a different profit payoff as shown below: States of Nature Strategy Complete Failure Partial Success Total Success S1 $50k> 70K S2 20K 40K S3 0 50K S4 150K S5 0 0 0 Assume that the probabilities for each state are 30 percent, 50 percent, and 20 percent, respectively. a. Using the concept of expected value, what risk (i.e., strategy) should be taken? b. If the project manager adopts a go-for-broke attitude, what strategy should be selected? c. If the project manager is a pessimist and does not have the option of strategy S5, what risk would be taken? d. Would your answer to part c change if strategy S5 were an option? 17.4 Below are four categories of risk and ways that a company is currently handling the risks. According to Section 17.11, which risk handling options are being used? More than one answer may apply. a. A company is handling its high R&D financial risk by taking on partners and hiring subcontractors. The partners/subcontractors are expected to invest some of their own funds in the R&D effort in exchange for sole-source, long-term production contracts if the product undergoes successful commercialization. b. A company has decided to handle its marketing risks by offering a family of products to its customer base. Different features exist for each product offered. c. A company has product lines with a life expectancy of ten years or more. The company is handling its technical risks by performing extensive testing on new components and performing parallel technical development efforts for downstream enhancements. d. A company has large manufacturing costs for its high-tech products. The company will not begin production until it has a firm commitment for a certain quantity. The company uses learning curves and project management to control its costs.