Cost Effectiveness Analysis

Correct Answer: Project B

To determine the most cost-effective project using Cost Effectiveness Analysis, we need to calculate the benefit-cost ratio for each project. Project A: Benefit-Cost Ratio = $750,000 / $500,000 = 1.5 Project B: Benefit-Cost Ratio = $1,100,000 / $700,000 = 1.57 Project B has a higher benefit-cost ratio (1.57) compared to Project A (1.5), making it the more cost-effective option. This means that for every dollar invested in Project B, there is a higher return on investment. The other options are incorrect because: 1. Project A has a lower benefit-cost ratio, making it less cost-effective than Project B. 2. The projects are not equally cost-effective, as their benefit-cost ratios differ. 3. Choosing the project with the lowest initial investment is not the correct approach for Cost Effectiveness Analysis. This method would not consider the potential benefits, which are crucial for determining cost-effectiveness.

Correct Answer: More than 4 years

The project expenditure is $600,000 and the project is expected to save the organization $150,000 per year. Therefore, to recover the project expense or to reach the break-even point, it would take 600,000 divided by 150,000, which equals 4 years. 'Less than 2 years', 'Exactly 3 years', and 'Between 2 and 3 years' are all less than this 4 years break-even point, hence they are incorrect. Only 'More than 4 years' is correct, as it correctly reflects the time needed for the savings to exceed the project expenditure.

Correct Answer: Continue the project and prepare a risk response plan

In this given scenario, ABC Enterprises should proceed with the project but also prepare a risk response plan. This is the best path to follow considering the potential reward versus the risk. Despite an identified risk that could potentially increase the project cost by $30,000, the expected benefit of $300,000 still significantly exceeds the project's total possible cost, even with the additional risk. The probability of the risk also only stands at 10%. Now, let's look at why the other answers are not ideal- 'Stop the project because of the added risk' suggests a very conservative approach might be unnecessary given that the expected benefits still outweigh the costs substantially, even when considering the potential risk - 'Ignore the risk and continue as per the initial plan' is not responsible project management. Ignoring risks can lead to unforeseen and unplanned complications, better to prepare a plan in case the risk realizes- 'Include the additional cost in the initial cost and recalculate the benefits' would be misleading. The additional cost associated with the risk is not certain to occur, with just a 10% chance. Therefore, it should not be included in the initial costs.