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XYZ LLC , a manufacturing firm specializing in innovative electronic kitchen appliances, has an estimated firm value of USD 2 0 0 , 0 0
XYZ LLC a manufacturing firm specializing in innovative electronic kitchen appliances, has an estimated firm value of USD based on expected net cashflows, excluding risk costs. However, XYZ also faces potential risks. Specifically, there is a chance that manufacturing defects could result in a total loss of USD due to warranty payments and recalls.
As a risk management consultant, your role is to assist XYZ in selecting the most suitable risk management strategy. You have recommended a risk control technology that involves AIbased testing of the appliances before their market launch. Below are details on some risk management options.
Answer the following questions based on this information:
Option : Take no action. The residual cost of risk remains at USD Calculate XYZs firm value net of the total cost of risk.
Option : Invest $ in risk control, reducing the loss probability to The residual risk cost is $Calculate XYZs firm value net of the total cost of risk under option
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