Marcel Melo- 2

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Embry-Riddle Aeronautical University *

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510

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Finance

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Apr 3, 2024

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docx

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1 2.5 Assignment: Water and Sewer Utility Marcel Melo Embry-Riddle Aeronautical University HROM 510 – Enterprise Risk Management Professor Chris Mandel October 30, 2022
2 In the video that we watched about a water and sewer provider, there was a debate on whether System Development Fees (SDF) or System Improvement Charges (SIC) are better for collecting capitol charges over time. The impact of SDF’s versus SIC’s weigh both on the company value and the net present value. To understand what would be more beneficial we must first understand the difference between present value and net present value. According to Investopedia, “Present value (PV) is the current value of a future sum of money or stream of cash flow given a specified rate of return. Meanwhile, net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time” (Beers, 2022). This means that Present Value (PV) is what you’ll require to earn a certain amount of money in the near future, but it’s discounted by a rate of return. At the same time, Net Present Value (NPV) is used to decide how profitable your project might be over time, so it uses the present value cash outflows and inflows over time. If we were to look at SDF’s and SIC’s like stocks with equal basis points to their discount rates, the SDF’s would be a volaille stock with the potential to yield more capitol while the SIC would be a more consistent stock with potentially less capitol over the years. If we view the difference between the two in this manner, then we can assume the risk associated between the two options. Since risk is the basis for most Enterprise Risk Management (ERM) organizations, it would be safe to assume the decision-maker’s assessment would be based upon the highest probability of financial loss. Therefore, the organization’s decision maker would have to consider several risk-based scenarios based on market analysis in order to determine the best ERM strategy. While it might seem like a straightforward decision to go with the more stable SDF’s, the decision maker of this organization might need to ratify a strategic plan developed
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