A manufacturing firm determines that its payout schedule for worker's compensation is as follows: Payout %...

  

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A manufacturing firm determines that its payout schedule for worker's compensation is as follows: Payout % Year 1 2 3 4 5 30 25 Year 20 15 10 If the firm insures this exposure, the premium will be $950,000 payable upon inception of the policy. The premium represents 70% loss and 30% administrative expense. a) Demonstrate and explain if there are any cash flow advantages of self-insuring this loss if the firm's cost of capital is 6%. All calculations must be shown and your recommendations must be fully supported. $950,000 x 0.70= 665000 Payout % 1 $665000 x 30 2 $665000 x 25 3 $665000 x 20 4 $665000 x 15 5 $665000 x 10 FV 199500 + 285000=484500 166250 +285000 = 451250 133000 + 285000 418000 99750 + 285000 = 384750 66500 + 285000 = 351500 PV @ 6% 29070 27075 25080 23085 21090 125400 A manufacturing firm determines that its payout schedule for worker's compensation is as follows: Payout % Year 1 2 3 4 5 30 25 Year 20 15 10 If the firm insures this exposure, the premium will be $950,000 payable upon inception of the policy. The premium represents 70% loss and 30% administrative expense. a) Demonstrate and explain if there are any cash flow advantages of self-insuring this loss if the firm's cost of capital is 6%. All calculations must be shown and your recommendations must be fully supported. $950,000 x 0.70= 665000 Payout % 1 $665000 x 30 2 $665000 x 25 3 $665000 x 20 4 $665000 x 15 5 $665000 x 10 FV 199500 + 285000=484500 166250 +285000 = 451250 133000 + 285000 418000 99750 + 285000 = 384750 66500 + 285000 = 351500 PV @ 6% 29070 27075 25080 23085 21090 125400

Answer rating: 100% (QA)

Answil year 1 2 Premium Payout fr 9 30000 ... View the full answer