You are the risk manager at XYZ construction company. Based on a variety of industry parameters...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
You are the risk manager at XYZ construction company. Based on a variety of industry parameters and historical incident rates of on the job accidents at your firm, the probability and amount of a potential loss next year has been determined to be: Potential loss next year $ Probability of the potential loss 57.50 7.75% million At the suggestion of a workplace safety consultant you hired, XYZ could implement new safety policies and reduce the chance of the potential loss identified above. Details regarding the new safety policies are as follows:, it can reduce the chance of this loss to 3%, but the new safety policies have an upfront cost of $250,000. Suppose that the beta of the loss is 0 and the risk-free rate of interest is 5%. Cost to implement new safety policies Probability of loss with safety policies in place Beta of the potential loss Risk free interest rate $ 290,000 2.50% 0 4.00% Required (3 parts): 1. If XYZ has no insurance, what is the net present value of implementing the safety policies recommended by the workplac safety consultant? (4 marks) 2. How much would XYZ be willing to pay to fully insure for the potential loss (before implementing the new safety policies)? (3 marks) 3. You realize that fully insuring for the potential loss gives no incentive to adopting the new safety policies. So you come up with the idea that XYZ can save on insurance by having a deductible that would be paid in the event of a loss. What deductible amount would give incentive to implement the new safety policies? Hint: NPV of implementing the new safety policies would need to be positive. (3 marks) Let x be the deductible You are the risk manager at XYZ construction company. Based on a variety of industry parameters and historical incident rates of on the job accidents at your firm, the probability and amount of a potential loss next year has been determined to be: Potential loss next year $ Probability of the potential loss 57.50 7.75% million At the suggestion of a workplace safety consultant you hired, XYZ could implement new safety policies and reduce the chance of the potential loss identified above. Details regarding the new safety policies are as follows:, it can reduce the chance of this loss to 3%, but the new safety policies have an upfront cost of $250,000. Suppose that the beta of the loss is 0 and the risk-free rate of interest is 5%. Cost to implement new safety policies Probability of loss with safety policies in place Beta of the potential loss Risk free interest rate $ 290,000 2.50% 0 4.00% Required (3 parts): 1. If XYZ has no insurance, what is the net present value of implementing the safety policies recommended by the workplac safety consultant? (4 marks) 2. How much would XYZ be willing to pay to fully insure for the potential loss (before implementing the new safety policies)? (3 marks) 3. You realize that fully insuring for the potential loss gives no incentive to adopting the new safety policies. So you come up with the idea that XYZ can save on insurance by having a deductible that would be paid in the event of a loss. What deductible amount would give incentive to implement the new safety policies? Hint: NPV of implementing the new safety policies would need to be positive. (3 marks) Let x be the deductible
Expert Answer:
Related Book For
Fundamentals of Cost Accounting
ISBN: 978-0077398194
3rd Edition
Authors: William Lanen, Shannon Anderson, Michael Maher
Posted Date:
Students also viewed these finance questions
-
While auditing Babel Financials, Inc., Vincenzo noted the below claims which could qualify as exceptions: a. The sum insured under Tae Ho's personal accident policy is P300,000 for loss of a limb. He...
-
Dissertation Topic: "The Effects of Cybersecurity Measures on the Productivity and Well-being of Teleworkers in the Healthcare Industry". Introduction Draft no more than TWO paragraphs here -...
-
5. (8 points) (Determining a hidden "dot product vector") Consider the problem where one is given black-box access to a function f: {0, 1}" {0, 1} such that f(x) = a-z, where a {0,1}" is unknown....
-
Solve Problem 4.3.2 using the Manning equation (n = 0.011 for ductile iron) for friction losses instead of the Darcy-Weisbach equation. Problem 4.3.2 Determine flow rates in the branching pipe system...
-
Bunch and Johnson (2000) gave the following three different definitions of the optimal exercise price of an American put. 1. It is the value of the asset price at which one is indifferent between...
-
An 80-kg man rides in an elevator from the ground to an upper floor. The elevator goes from rest to \(10 \mathrm{~m} / \mathrm{s}\) in 5 seconds, and then continues at the same constant speed for 10...
-
In 2009, Xio and Xandra each invest $300,000 to create Xava Corporation. Xava develops and manufactures rock climbing and bungee jumping equipment. The business has become very profitable (it now is...
-
4. An ideal gas undergoes a thermodynamic process in which internal energy aP4, where a is a (U) of the gas depends on pressure (P) of the gas as =
-
Create a java program based on the uml. -int ID (read only) -String name -double unitPrice -int quantity +Item() +Item(int id, String name, double unitPrice, int quantity) +Item(Item sourceltem, int...
-
Provide examples of sports you believe would appeal to each of the six social class categories (upperupper through lower- lower). What sports appeal to all social class segments?
-
You buy $1,000 worth of Walmart stock. Why wouldnt a macroeconomist call this investment?
-
Describe, in detail, the family life cycle and how it is used as a strategic tool when segmenting sports markets. What stage of the family life cycle are you currently in? How does this affect your...
-
You are hired as the director of sports marketing for a new minor league hockey franchise in Chicago, a city that already has an NHL team. Describe how you would segment, target, and position your...
-
What are ISO 9001 and Six Sigma?
-
Write about the relationship between budgetary fund balance and actual fund balance, the village of alberts alley recorded the following budgetary journal entry at the beginning of fiscal 2013:...
-
A seasonal index may be less than one, equal to one, or greater than one. Explain what each of these values would mean.
-
Use subjective judgment to estimate the probability that the next time you ride an elevator, it gets stuck between floors.
-
Because it is impossible for Thanksgiving to fall on Tuesday, the probability of Thanksgiving falling on Tuesday is 0. For Exercises 510, decide whether the statement makes sense (or is clearly true)...
-
What do we mean when we say that the probability of getting 20 babies of the same gender when 20 random babies are born is 1/524,288? Is such an event unusual? Why or why not?
Study smarter with the SolutionInn App