Expected Monetary Value of the Project - Assignment Example

The determination of the risk for the decision-makers is done by considering the expected cost for each option in the decision tree, and once this is done, the swing weights can then be sued to calculate the risk. Assuming that each option has some probability of occurrence, this probability can be used to calculate the overall risk figures as follows:

The risks of the decision situation can then be calculated as:

Decision

Swing Weight

Cost

EMV

Update Infrastructure

0.2

=100+1000 = 1100

220

Keep Existing Capacity

0.25

=600+500 = 1100

275

Manage Capital

0.4

=1000 = 1000

400

Train Workers

0.05

=100 = 100

5

Hire New Workers

0.1

= 600 = 600

60

From the preference curve constructed, it can be seen that the shareholders for the project are risk-averse since the graph is curved outwards. Risk averseness indicates that the shareholders prefer to take on projects that have a low risk. The preference for projects with a low risk indicates that the shareholders would prefer not to gain high returns at the expense of losing a lot of investment.

The personal risk levels of each shareholder are reflected in the overall risk profile since the swing weights are calculated from their swing weights. To increase their risk tolerance, management can decide to make changes in the project that seem more favorable than the current risk profile, for example, the introduction of other options to reduce the uncertainty of the individual options.