1 inflation is not reflected in mmcls projections

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1. Inflation is not reflected in MMCL’s projections. Based upon MMCL’s projections and assuming a 6% interest rate for discounting purposes, please determine the inflation rate that is equivalent to the 15% contingency allowance. When calculating this value, please ensure that you remove the costs that you would not expect to be transferred to Can-Do and reflect any cost benefit that Can-Do would realize from internalizing some of the costs (for example, inspections). 2. There are clearly risks that the durations of MMCL’s short and long term cost projections will be exceeded. Please prepare three sensitivity tests of the duration of the costs in MMCL’s projections by adding: One year to the short term costs; Two years to the short term costs; and Five years to the long term costs. 3. Re-value MMCL’s projections and the durational sensitivity tests using an inflation assumption of 3% and no contingency allowance. Also sensitivity test the inflation rate assuming the rate increases to 4%. 4. Sensitivity test the discount rate assumption of 6% by assuming it changes to both 5% and 7%. 5. The sensitivity tests will enable us to examine the risks associated with the duration of the post closure costs and with inflation and investment income during the post closure period. Please identify any other risks we should be concerned about.
© 2003 - 2013 Society of Actuaries | SOA_FAP_Mod1Exercise01-01Assignment.docx| Page 5 6. Based upon all of your work, at what amount do you recommend we set our walk-away point? 7. Based upon all of your work, what are the key risk factors (i.e., the most important assumptions) in your assessment? 8. Management will use your report. As a result, it should well-organized and understandable. Your report must summarize the data, methods and assumptions that you use in your analysis. Reporting of sensitivity test results should be included in a single summary table. Do not repeatedly copy and paste the budget multiple times to show how the sensitivity tests affects every line item, as it is not necessary to show this much detail. If you have any ideas for managing the risks identified, please include them in your report. Your Deliverables You should prepare two deliverables: a written memorandum and an enhanced spreadsheet. These are described below. The Memorandum After you’ve completed your analysis to arrive at your answers or to address the issues presented above, please write a memorandum reporting your results. Your memorandum, which you should create in Microsoft Word (or compatible word processing program), could be organized as follows: Executive Summary —This section of the memorandum summarizes in a single page the issues that we should be most concerned about and provides background to the reader in a few sentences. For actuarial reports, the summary often identifies the data, its source and how it was modeled. It should clearly state your major conclusions. Good executive summaries state recommended actions to address any outstanding issues and state any outstanding concerns in a

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