NATIONAL OPEN UNIVERSITY OF NIGERIA

UNIVERSITY VILLAGE, PLOT 91, CASDASTRAL ZONE, NNAMDI AZIKIWE EXPRESS WAY, JABI, ABUJA.
FACULTY OF MANAGEMENT SCIENCES
JANUARY/FEBRUARY 2013 EXAMINATION

Course Code:               MBF 846                        Credit Units:  2

Course Title:              Risk Management

Time Allowed:            2 HOURS

Instructions:               1. Attempt question number one (1) and any other two (2).

                                    2. Question number 1 is compulsory and carries 30 marks while the other 2 questions carry 20 marks each.

                                    3. Present all your points in coherent and orderly manner.

1a. Define payback period.

 Mention only two merit and two demerits of payback period.

1b. If N500 is received for five years, what will be its present value (PV) at a 20% discounted rate?

1c. List ten (10) functions of insurance.

2. Given: discount rate  = 10%

Life of project = 10years

Zero year (at the beginning of the project), bought land for N5million

Year 1- Building (Construction of building for the project) = N20million

Year 2 – Machines (bought machineries) = N30million

Year 3-5 for 3 to 5years, operation and maintenance cost is N3million

Year 6-10 for 6 to 10 years, operations and maintenance cost is N5million

Year 3 to 6years working capital is N1.5million

Year 7 to 10years working capital is N3.2million

BENEFITS (PWB)

3 to 7years sales of products for N20million

8 to 10 years sales of products for N30million

11^th year salvage is N25million

11^th year is been used here because it’s more practical than using the 10^th year because even if you want to sell the machines after the 10^th year, it will enter into the 11^th year. that is, you will only be able to sell machines after the 10^th year.

Question: 2a. Find out if the project is viable or not. Note that discount rate is the opportunity cost of the money as determined by the central bank of a country where the project takes place. Normally, discount rate and interest rate are the same.

2b. Using the NPV method, find the PWC and PWB.

Note that: NPV = PWB – PWC

Where NPV – Net Present Value

           PWB – Present Worth of Benefit

           PWC -  Present Worth of Cost

3 Differentiate between:

1. Risk and Uncertainty
2. Pure risk and Speculative risk
3. Fundamental risk and particular risk
4. Dynamic risk and static risk

Subjective risk and objective risk