Use risk analysis to determine the probability that no additional cost is incurred if the decision to install the flood protection system at a cost of $120,000 is made.

The following tables show the relevant index over the years. As an economist at a local bank, you have been tasked to advise the bank’s fund manager on the economic outlook.  Table 2-1: Total Manufacturing Index Year Quarter 1 2 3 4 2011 101.3 99.3 99.4 99.9 2012 100.1 103.4 98 99.7 2013 93.8 104.2 103.1 106.8 2014 102.8 105.6 104.9 2015         Page 4 of 5  Table 2-2: Electronics Cluster Index Year Quarter 1 2 3 4 2011 111.8 101.5 94.8 91.9 2012 92.6 93 87 82.1 2013 82.3 93.3 93.4 98 2014 89.8 87.9 93.4 2015        Source: partially extracted from Department of Statistics (2015) Statistical Tables from Economic Survey of Singapore (Accessed 1st July 2015)   (a) Provide an understanding and background discussion on the methodology of forecasting. (10 marks)  (b) Determine the seasonality of the data by conducting an in-depth seasonality analysis for Table 2-1 and 2-2. For each quarter, indicate the seasonal indexes, the deseasonalised time series and the trend line that will fit the deseasonalized time series. Adjust the seasonal indexes, if necessary. Provide justification on the appropriateness of seasonality analysis. (20 marks)  (c) Employ an appropriate model to forecast the index for Table 2-1 and 2-2, from the 2nd Quarter of 2015 to the 4th Quarter of 2016.  (5 marks)  (d) Comment on possible forecast errors and the causes of these errors. (10 marks)  (e) Develop an overall conclusion of your forecasting findings and recommendations.  (10 marks)   Question 3  A local property developer has a major office cum retail mall development in the city area. It is in the final stage of completion and the developer is considering the installation of a flood protection system that will help to minimise damages caused by flash flood. In the event of a flash flood, the damages caused to the underground carparks will amount to $600,000. However, the flood protection system cost $120,000 to install and is of a single usage. Furthermore, it does not provide 100% protection against damages due to flash floods. With the flood protection system installed, these are the possible damages if a flash flood were to occur:  Table 3-1: Possible Outcomes Probability Damages 0.35 $0 0.25 $20,000 0.10 $35,000 0.30 $50,000   Based on the historical weather data, the probability of a flash flood occurring is 0.25.   (a) Determine the decision to be made using the decision tree approach. Show the decision tree and compute the expected values for each node. Interpret the result. (18 marks)  (b) Use risk analysis to determine the probability that no additional cost is incurred if the decision to install the flood protection system at a cost of $120,000 is made.

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