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(solution) Great West States (GWS) is a railroad company operating in the


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 that Juanita should consider not only pure risks but also finan- cial risks. Juanita discovered that a significant financial risk facing the organization is a commodity price riskthe risk of a significant increase in the price of fuel for the compa- ny's locomotives. A review of the company's income and expense statement showed that last year about 28 percent of its expenses were related to 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 be $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 after investment in the project. GWS is considering expanding its routes to include Colorado, New Mexico, Texas, and Oklahoma. The com- pany is concerned about the number of derailments that might occur. Juanita ran a regression with "thousands of miles GWS locomotives traveled" as the independent varia- ble and "number of derailments" as the dependent variable. Results of the regression are as follows: Y

 


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