The management of Parklife Ltd, a small business, has just undertaken the appraisal of a major investment in a new production facility. As an independent consultant on business, the management has asked you to go through the calculations and give your opinion on whether the data, assumptions, approach and calculations used in the appraisal seem reasonable.

You discover that the appraisal was based on net present value (NPV) assessment, using best estimates of all of the input figures. You are satisfied that everything else about the appraisal is reasonable. You note that the appraisal shows a comfortable positive NPV.

When you asked the management what they had done about risk, you were told that it had been ignored because no one in the business knew how to deal with it. You have now been asked to draw up some briefing notes for the management that identify possible approaches that could be taken to dealing with risk.

Required:

Draw up the briefing note requested. This should identify all possible approaches that the management could adopt to take risk into account. The strengths and weaknesses of each approach, in the context of this particular decision, should be highlighted.

AppendixLO1