Please provide a loss control capital budgeting analysis for the following case:

Foody LTD is a food delivery company. They have 40 cars and 10 vans. The past accident history can generate the following auto accident statistics:

Expected number Incidents Per Year per vehicle	Expected Loss Per car	Expected Loss Per van
1	200	700
0.25	700	1500
0.05	8000	12,000
0.01	19,000	25,000
.0005	40,000	100,000

The Manager is considering the installation of controllers in every vehicle.

Installing controllers reduces the expected severity of an accident by 15% and reduces the frequency of losses by 10%.

Currently, Foody LTD annually pays $61,000 for auto insurance and has a $1000 deductible per loss.

If they install controllers in all vehicles, the insurer offered them a new premium of $48,800 with the same deductible.

Each controller costs $600 and has an expected life of 5 years.

At the end of years 1 through 4, each controller will have to be recalibrated and the cost for this is $100 per vehicle. Controllers can be depreciated on a straight-line basis

To make use of the new controllers, drivers need to take a safety course. The total cost of the safety course, which must be completed within the first 2 weeks of every year, is $10,000 for the first year, but the price falls to $5000 for the remaining years.

Foody LTD’s tax rate is 34%, and its cost of capital is 10%.

1. Before the controllers are installed, what is the total expected annual losses arising from auto accidents?
2. Before the controllers are installed, what is Foody LTD’s expected annual retention?
3. If Foody LTD installs the controllers, what are the total expected annual losses arising from auto accidents?
4. If Foody LTD installs the controllers, what is Foody LTD’s expected annual retention?
5. Should Foody LTD implement this risk management plan?

Answer rating: 100% (QA)

To carry out a loss manage capital budgeting evaluation for the given case we can want to calculate the following Total predicted annual losses spring... View the full answer