In: Finance
a,Expected claim cost=probability of claim*damage amount
=.05*$30million
=$1.5 Million
b,Amount of loading on the policy=Premium-(expected claim cost)
=$1.5 million-$1.5 million=0
c,Expected Cost of not pursuing project=NPV of project-insurance premium
=$2million-$1.5 million=$500,000
d.Cost of policy premium =$1.5 million and expected cost of damage=$1.5million
Both expected damage and cost of premium are equal,but purchase of policy is recommended because
1.Nothing is added in the policy premium for administrative expenses of the policy
2.Insurance covers risk,even if damage is occured more than expected.