Purchase Solution

Risk Management: NPV of Implementing New Policies

Not what you're looking for?

Ask Custom Question

Your firm faces a 9% chance of a potential loss of $10 million next year. If your firm implements new policies, it can reduce the chance of this loss to 4%, but these new policies have an upfront cost of $100,000. Suppose the beta of the loss is 0, and the risk-free interest is 5%.

a. If the firm is uninsured, what is the NPV of implementing the new policies?

b. If the firm is fully insured, what is the NPV of implementing the new policies?

c. Given your answer to part (b), what is the actuarially fair cost of full insurance?

d. What is the minimum-size deductible that would leave your firm with an incentive to implement the new policies?

e. What is the actuarially fair price of an insurance policy with the deductible in part (d)?

Purchase this Solution

Solution Summary

The NPV for implementing new policies is determined. The cost of insurance for risk management is analyzed in the solution.

Purchase this Solution


Free BrainMass Quizzes
Social Media: Pinterest

This quiz introduces basic concepts of Pinterest social media

Writing Business Plans

This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.

Production and cost theory

Understanding production and cost phenomena will permit firms to make wise decisions concerning output volume.

Organizational Leadership Quiz

This quiz prepares a person to do well when it comes to studying organizational leadership in their studies.

Business Processes

This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.