Risk Management

Question 4

Read the scenario below and answer the questions that follow.

An online retailer needs to decide between setting up its own logistics network, or partnering with a courier company to do deliveries. If it proceeds with setting up its own logistics network, it needs a large fleet and storage facilities for all the vehicles. The decision tree, with all the outcomes, is given below:

Setup own logistics infrastructure

Economic activity	Low	Normal	High
Probability	0.10	0.70	0.20
Income (R mil)	12	36	60
Expenses (R mil)	30	30	9

Partner with courier company

Economic activity	Low	Normal	High
Probability	0.10	0.70	0.20
Income (R mil)	12	33	57
Expenses (R mil)	9	24	42

4.1 Calculate the expected profit for the two options.