PROBLEM 1 (20 pts total) The KOF is an organization tasked with safeguarding Moon City and managing local affairs concerning procurement and delivery of vital services to its denizens, among other responsibilities. It is known that the KOF's management has set a hurdle rate (i.e., the minimum rate of return required for a project to be financially attractive to the organization) of i= 18% per year for any prospective project. The KOF had just recently undergone their first audit. Two key findings were as follows: Audit Finding 1: A major accounting error in the KOF's books was discovered that had been costing the organization an additional 0.2B euros annually. This had been flagged as a possible risk three years ago when their new procurement system was just being implemented. At the time, it was identified to cost some unknown amount to resolve, paid uprront at the start of the year. This risk was initially assessed to have no negative financial impact even if left alone, and so was deemed unnecessary to act on. Had they pushed through with the risk mitigation measure, there would have been 0.2B euros less in annual expenses for the succeeding three years. Audit Finding 2: Due to a lack of control measures in place, the KOF had been overpaying its suppliers for the annual procurement of some goods and services over the last five years. The amount overpaid each year amounted to 0.25B euros, 0.04B euros, 0.18B euros, 0.1B euros, and 0.08E euros respectively. 2a. For audit finding 1, suppose that the KOF had known the cost they would have incurred due to the uncovered accounting error. At most how much should the KOF have been willing to pay three years ago to implement the risk mitigation measure? Model the CFD and solve. [10 points] 2b. For audit finding 2, suppose that the organization can recover the full overpaid amount (but not its equivalent value) at the cost of some administrative expenses for processing the cash recovery. The collection is not immediate, but instead, is estimated to be 50% recovered one year from today and 100% recovered two years from today. At most how much should the KOF be willing to pay upfront today to begin processing the recovery of the overpaid amounts? Model the CFD and solve. [10 points] PROBLEM 1 (20 pts total) The KOF is an organization tasked with safeguarding Moon City and managing local affairs concerning procurement and delivery of vital services to its denizens, among other responsibilities. It is known that the KOF's management has set a hurdle rate (i.e., the minimum rate of return required for a project to be financially attractive to the organization) of i= 18% per year for any prospective project. The KOF had just recently undergone their first audit. Two key findings were as follows: Audit Finding 1: A major accounting error in the KOF's books was discovered that had been costing the organization an additional 0.2B euros annually. This had been flagged as a possible risk three years ago when their new procurement system was just being implemented. At the time, it was identified to cost some unknown amount to resolve, paid uprront at the start of the year. This risk was initially assessed to have no negative financial impact even if left alone, and so was deemed unnecessary to act on. Had they pushed through with the risk mitigation measure, there would have been 0.2B euros less in annual expenses for the succeeding three years. Audit Finding 2: Due to a lack of control measures in place, the KOF had been overpaying its suppliers for the annual procurement of some goods and services over the last five years. The amount overpaid each year amounted to 0.25B euros, 0.04B euros, 0.18B euros, 0.1B euros, and 0.08E euros respectively. 2a. For audit finding 1, suppose that the KOF had known the cost they would have incurred due to the uncovered accounting error. At most how much should the KOF have been willing to pay three years ago to implement the risk mitigation measure? Model the CFD and solve. [10 points] 2b. For audit finding 2, suppose that the organization can recover the full overpaid amount (but not its equivalent value) at the cost of some administrative expenses for processing the cash recovery. The collection is not immediate, but instead, is estimated to be 50% recovered one year from today and 100% recovered two years from today. At most how much should the KOF be willing to pay upfront today to begin processing the recovery of the overpaid amounts? Model the CFD and solve. [10 points]
