Question

You are concerned about the risk that an avalanche poses to your $3 million shipping facility. Based on expert opinion, you determine that there is a 5 percent chance that an avalanche will occur each year. Experts advise you that an avalanche would completely destroy your building and require you to rebuild on the same land. Ninety percent of the $3 million value of the facility is attributed to the building, and 10 percent is attributed to the land itself. What is the single loss expectancy of your shipping facility to avalanches?
A. $3,000,000
B. $2,700,000
C. $270,000
D. $135,000

Answer 1

Answer:

B. $2,700,000

Explanation:

Single Loss Expectancy (SLE) is the expected monetary loss in case of an occurrence represented by an exposure factor. The exposure factor represents a percentage of the total asset value that would be lost due to a given occurrence. In this case, the exposure factor is 90% since all of the facility would be lost in case of an avalanche while the land would remain unscathed. Therefore, the SLE is:

$SLE = 3,000,000*0.9\\SLE = 2,700,000$

* Note that SLE is different from expected loss (EL). For expected loss, the likelihood of an avalanche should be considered.