Read the article below and answer ALL the questions that follow.

MAKING BETTER DECISIONS ABOUT THE RISKS OF CAPITAL PROJECTS

Never is the fear factor higher for managers than when they are making strategic investment decisions on multibillion$-$

dollar capital projects. With such high stakes, we have seen many managers prepare elaborate financial models to justify

potential projects. But when it comes down to the final decision, especially when hard choices need to be made among

multiple opportunities, they resort to less rigorous means$$arbitrarily discounting estimates of expected returns, for

example, or applying overly broad risk premiums.

There are more transparent ways to bring assessments of risk into investment decisions. Consultants have found that

some analytical tools commonly employed by oil and gas companies can be particularly useful for players in other

capital$-$intensive industries, such as those investing in projects with long lead times or those investing in shorter$-$term

projects that depend on the economic cycle. The result can be a more informed, data$-$driven discussion on a range of

possible outcomes. Of course, even these tools are subject to assumptions that can be speculative. But the insights they

provide still produce a more structured approach to making decisions and a better dialogue about the trade$-$offs.

Some of the tools that follow may be familiar to academics and even some practitioners. Many companies use a subset

of them in an ad hoc fashion for particularly tricky decisions. The real power comes from using them systematically,

however, leading to better decisions from a more informed starting point: a fact$-$based depiction of how much a

company$$s current performance is at risk; a consistent assessment of each project$$s risks and returns; how those projects

compare; and how current and potential projects can be best combined into a single portfolio. Companies evaluating a

new investment project sometimes rush headlong into an assessment of risks and returns of the project alone without

fully understanding the sources and magnitude of the risks they already face. This is not surprising, perhaps, since

managers naturally feel they know their own business. However, it does undermine their ability to understand the

potential results of a new investment. Even a first$-$class evaluation of a new project only goes so far if managers can$$t

compare it with the status quo or gauge the incremental risk impact.

Consider, for example, what happened when managers at one North American oil company were evaluating a new

investment. When they quantified the company$$s existing risk from commodity$-$price uncertainty, transport congestion,

and regulatory developments, they realized their assumptions were overly optimistic about future cash flow in the new

investment. In fact, in a range of possible outcomes, there was only a $5$ percent chance that performance would meet

their base$-$case projections. Moreover, once they mapped likely cash flows against capital requirements and dividends,

managers were alarmed that they had only a $5$ percent chance of meeting their capital needs before the project$$s fourth

year and on average wouldn$$t meet them until year six. Fortunately, managers were able to put the insight to good use;

they modified their strategic plan to make it more resilient to risk. Managing risk $($and return$)$ in capital$-$project and

portfolio decisions will always be a challenge. But with an expanded set of tools, it is possible to focus risk$-$return

decisions and enrich decision making, launching a dialogue about how to proactively manage those risks that matter

most in a more timely fashion.

QUESTION $1(20$ Marks$)$

Provide advice to the consultants in the article on how the project risk management principles may be implemented

prudently in order to manage their project risks effectively. Ensure that relevant examples are mentioned to justify your theoretical assertions.

QUESTION $2(20$ Marks$)$

In your current studies of project risks, you have familiarised yourself with various examples of project risks. Refer to

resource and team risks and provide advice to the consultants in the article on how they may ensure that these risks are

managed effectively on their projects. Apply the theory to relevant examples.

QUESTION $3(20$ Marks$)$

The benefits of implementing risk management in projects are huge. This allows you to deliver your project on time, on

budget, and with the quality results your project sponsor demands. The ten golden rules of project risk management

provide a set of guidelines on how to implement risk management successfully in projects. Analyse any FIVE $(5)$ of the

ten golden rules and discuss how you will implement these in a project that you are familiar with.

QUESTION $4(20$ Marks$)$

When planning for project risk, there is a specific risk response process that has proven to be effective. Apply this risk

response process to a project of your choice.