Q : Suppose that an attack would do $300,000 in damage and has a 20% annual prob

Question

Q: Suppose that an attack would do $300,000 in damage and has a 20% annual probability of success. Spending $15,000 per year on Countermeasure A would reduce the damage of a successful attack by 50%.

a) Do a risk analysis comparing benefits and costs. Show your work clearly. Explain whether or not the company should spend the money.

b) Do another risk analysis if Countermeasure B costs $30,000 per year but would cut the annual probability of a successful attack by 40%. Again, show your work. Explain whether or not the company should spend the money.

Explanation / Answer

1) Since the probability of success of an attack is 20 % in an year. So, we can say that it has 1 / 5 chances to take place in one year or we can say that on an average an attack will take place in every 5 years, which will cost $300,000.

On the other hand, if we spend $15,000 per year to reduce the propability of attack by 50%.

Then calculating the new probability of attack as : 50% of probability of attack is cut 20% comes out to be 10%., which means that now the probability of success of an attack is 10 % in an year. So, we can say that it has 1 / 10 chances to take place in one year or we can say that on an average an attack will take place in every 10 years, which will cost $300,000.

While Countermeasure A cost for 10 years will be $15,000 * 10 = $150,000.

So, we can clearly see that on taking countermeasure A, we are saving our cost by $300,000 - $150,000 = $150,000 per ten years or $15,000 per year.

2) Since the probability of success of an attack is 20 % in an year. So, we can say that it has 1 / 5 chances to take place in one year or we can say that on an average an attack will take place in every 5 years, which will cost $300,000.

On the other hand, if we spend $30,000 per year to reduce the propability of attack by 40%.

Then calculating the new probability of attack as : 40% probability of attack is cut of 20% comes out to be 8%., which means that now the probability of success of an attack is 12 % in an year. So, we can say that on average an attack will take place after 1 / 12 * 100 = 8.33 years or 8 years 4 months.

While Countermeasure B cost for 8 years 4 months will be $30,000 * 25 / 3 = $250,000.

So, we can clearly see that on taking countermeasure A, we are saving our cost by $300,000 - $250,000 = $50,000 per 8 years and 4 months

THANK YOU.

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