a. Easy Van is a logistic company providing door-to-door delivery service in Hong Kong with a...

 

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a. Easy Van is a logistic company providing door-to-door delivery service in Hong Kong with a fleet of 180 vans and trucks. To restrain the increasing costs of insurance premium, the Financial Controller of Easy Van is considering retaining all the 'own damage' losses of its vans and trucks under the company's retention programme. Briefly explain 'retention'. i. 2 marks ii. Examine the potential benefits and problems that Easy Van may encounter in retaining all the 'own damage' losses of its vans and trucks under the company's retention programme. b. Cheezy Food Limited is considering implementing a risk control system, which will cost about $8,500,000 installation cost. As Risk Manager of Cheezy Food, Sarah has identified the following two mutually exclusive work projects with the estimated cash flows for the completion of the risk control system: Year 0 1 2 3 4 5 Cash Flow (Project X) $ -8,500,000 1,150,000 9 marks 1,600,000 2,000,000 2,800,000 2,500,000 Cash Flow (Project Y) $ -8,500,000 850,000 1,400,000 2,600,000 3,500,000 2,800,0000 i. Suppose that the market interest rate is 6%, calculate the net present value (NPV) for each of these projects: Project X and Project Y. ii. As Risk Manager of Cheezy Food Limited, which project will Sarah choose if she applies the Net Present Value (NVP) criterion decision rule? iii. In addition to the estimated net after-tax cash flows, wha are the other relevant factors that Sarah, as the risk manager of Cheezy Food, should consider? Explain your answers and show all your calculations. 12 marks a. Easy Van is a logistic company providing door-to-door delivery service in Hong Kong with a fleet of 180 vans and trucks. To restrain the increasing costs of insurance premium, the Financial Controller of Easy Van is considering retaining all the 'own damage' losses of its vans and trucks under the company's retention programme. Briefly explain 'retention'. i. 2 marks ii. Examine the potential benefits and problems that Easy Van may encounter in retaining all the 'own damage' losses of its vans and trucks under the company's retention programme. b. Cheezy Food Limited is considering implementing a risk control system, which will cost about $8,500,000 installation cost. As Risk Manager of Cheezy Food, Sarah has identified the following two mutually exclusive work projects with the estimated cash flows for the completion of the risk control system: Year 0 1 2 3 4 5 Cash Flow (Project X) $ -8,500,000 1,150,000 9 marks 1,600,000 2,000,000 2,800,000 2,500,000 Cash Flow (Project Y) $ -8,500,000 850,000 1,400,000 2,600,000 3,500,000 2,800,0000 i. Suppose that the market interest rate is 6%, calculate the net present value (NPV) for each of these projects: Project X and Project Y. ii. As Risk Manager of Cheezy Food Limited, which project will Sarah choose if she applies the Net Present Value (NVP) criterion decision rule? iii. In addition to the estimated net after-tax cash flows, wha are the other relevant factors that Sarah, as the risk manager of Cheezy Food, should consider? Explain your answers and show all your calculations. 12 marks

Answer rating: 100% (QA)

a i Retention refers to a risk management strategy where a company decides to assume and retain a certain level of risk within its organization instead of transferring it entirely to an external insur... View the full answer