Final answer:
Risk assessment in business involves a process by which upper management determines which risks to mitigate, transfer, or accept based on a cost/benefit analysis. This includes evaluating financial and labor costs against benefits such as savings or efficiency gains, and may use mathematical modeling as well as present discounted value for decision making.
Step-by-step explanation:
The passage in question refers to a risk assessment process which is a key component of strategic management within organizations. This process is integral for making informed decisions regarding risk management. Upper management performs it to consider the details of potential risks and determine which risks should be mitigated, transferred, or accepted. Cost/benefit analysis is employed as a valuable tool to evaluate these decisions. When analyzing the costs, it involves assessing the financial, labor, and opportunity costs that could be incurred. The benefits, on the other hand, might include savings, efficiency gains, or other positive outcomes that result from a particular decision.
Incorporation of present discounted value is critical when the costs and benefits occur over different time periods, allowing for a fair comparison by adjusting the value of future benefits and costs to today's terms. Mathematical modeling may also be used to predict the cost of various alternative solutions and assess their viability compared to other options. This facilitates a more normalized comparison. The decision-making process is influenced by weighing up these different aspects, seeking to maximize net benefits and minimize the potential negative consequences of each risk.