CASE – 1
Great West States (GWS) is a railroad company operating in the Western United States. Juanita Salazar is risk manager of GWS. At the direction of the company’s chief executive officer, she is searching for ways to handle the company’s risks in a more economical way. The CEO stressed the Juanita should consider not only pure risks but also financial risks. Juanita discovered that a significant financial risk facing the organization is a commodity price risk—the risk of a significant increase in the price of fuel oil for the company’s locomotives. A review of the company’s income and expense statement showed that last year about 16 percent of its expenses were fuel oil.
Juanita was also asked to determine whether the installation of a new sprinkler system at the corporate headquarters building would be justified. The cost of the project would by $40,000. She estimates the project would provide an after-tax net cash flow of $25,000 per year for three years, with the first of these cash flows coming one year from today.