CIS608: Mesusa Corporation - Calculate ARO, ALE, and CBA

ALE is a common quantitative method for assessing risk. The first step in calculating ALE is to calculate Single Loss Expectancy (SLE). --> SLE = asset value * exposure factor ALE is then calculated by multiplying SLE by Annualized Rate of Occurrence (ARO). --> ALE = SLE * ARO For example, to calculate the exposure factor, assume the asset value of a small office building and its contents is $2 million. Also assume that this building houses the call center for a business, and the complete loss of the center would take away about half of the capability of the company. Therefore, the exposure factor is 50 percent. The SLE is $2 million * 0.5 = $1 million. The ALE is then calculated simply by multiplying the SLE by the number of times the event is expected to occur in a year, which is called the annualized rate of occurrence (ARO): --> ALE = SLE * ARO. If the event is expected to occur once in 20 years, then the ARO is 1/20. Typically the ARO is defined by historical data, either from a company’s own experience or from industry surveys. Continuing our example, assume that a fire at this business’s location is expected to occur about once in 20 years. Given this information, the ALE is: $1 million * 1/20 = $50,000. Therefore, in order to protect the office building the company should spend no more than $50,000 on countermeasures protecting the building from complete loss. Office building and contents = $2 million Exposure factor 50% SLE = $2 million * 0.5 = $1 million ALE = SLE * ARO • ARO = 1/20 (One occurrence every 20 years) ALE = $1 million * 1/20 = $50,000 ARO = Annual Rate of Occurrence. Do NOT get bogged down in the equation. Annual Rate of Occurrence is simply how many times this occurs in a year. If the spreadsheet says weekly and there are 52 weeks in a year, ARO = 52. The only time folks get in trouble with this assignment is by trying to go too deep. This should be your easiest assignment of the course.