Question

You are concerned about the risk that a hurricane poses to your corporate headquarters in South Florida. The building itself is valued at $15 million. After consulting with the National Weather Service, you determine that there is a 10 percent likelihood that a hurricane will strike over the course of a year. You hired a team of architects and engineers who determined that the average hurricane would destroy approximately 50 percent of the building. What is the annualized loss expectancy (ALE)?
A. $750,000
B. $1.5 million
C. $7.5 million
D. $15 million

Answer 1

Answer:

A) $750,000

Explanation:

The annualized loss expectancy (ALE) is calculated by multiplying the asset retirement obligation (ARO) times the single loss expectancy (SLE):

ARO = 10% (likelihood that a hurricane will strike)

SLE = 50% (potential loss) x $15 million (property value) = $7.5 million

annualized loss expectancy (ALE) = 10% x $7.5 million = $750,000