Question

In: Finance

A firm owns a building worth 1,500,000. The premium for insurance on the building will cost...

A firm owns a building worth 1,500,000. The premium for insurance on the building will cost $50,000.00. Expected annual losses on the building is $30,000. The firm would earn 14% on funds applied to operations. Invested reserves earn 4%. What is the true cost of retaining the risk of loss on its building, including opportunity costs. Explain your answer and show your work.

Solutions

Expert Solution

Building worth - 1,500,000

Insurance premium - $50,000

Annual losses - $30,000

True cost of retaining the building

Insurance premiums + retained losses + risk control cost
50,000 + 30,000 = $80,000

Opportunity cost (14%-4%) - 10%

Fund employed =$1,500,000 *10%

=$150,000

=80,000 + 150,000

=$230,000


Related Solutions

The annual insurance premium for the factory building would be a: a. fixed cost, period cost,...
The annual insurance premium for the factory building would be a: a. fixed cost, period cost, and indirect cost with regard to units of product. b. fixed cost, product cost, and direct cost with regard to units of product. c. variable cost, product cost, and direct cost with regard to units of product. d. fixed cost, product cost, and indirect cost with regard to units of product.
Discuss the building blocks of an insurance premium.
Discuss the building blocks of an insurance premium.
A coffee producer holds (owns) a current inventory of coffee worth $6 million (or 1,500,000 pounds)...
A coffee producer holds (owns) a current inventory of coffee worth $6 million (or 1,500,000 pounds) at current spot prices of $4.00 per pound. He plans to sell this inventory in 12 months, or on December 23, 2020. He fears that the price of coffee could fall in 12 months. He is considering a minimum variance (risk) hedge of his inventory using the coffee futures contract. The current price of Dec 2020 coffee futures is $4.10 per pound and the...
A coffee producer holds (owns) a current inventory of coffee worth $6 million (or 1,500,000 pounds)...
A coffee producer holds (owns) a current inventory of coffee worth $6 million (or 1,500,000 pounds) at current spot prices of $4.00 per pound. He plans to sell this inventory in 12 months, or on December 23, 2020. He fears that the price of coffee could fall in 12 months. He is considering a minimum variance (risk) hedge of his inventory using the coffee futures contract. The current price of Dec 2020 coffee futures is $4.10 per pound and the...
Please explain and discuss the building blocks of the insurance premium.
Please explain and discuss the building blocks of the insurance premium.
For life insurance policies, some of the premium pays for the cost of the insurance, and...
For life insurance policies, some of the premium pays for the cost of the insurance, and the remainder goes toward the cash value of the policy and earns interest like a savings account. Consider the following insurance company options. Company 1: pays 4.9% compounded monthly on the cash value of their policies Company 2: pays 4.93% compounded semiannually on the cash value of their policies What is the APY offered by each company? (Round your answers to the nearest hundredth.)...
An individual owns a car that is worth $20,000, and is considering buying insurance. However, the...
An individual owns a car that is worth $20,000, and is considering buying insurance. However, the only insurance which is available has a maximum coverage of $15,000, i.e. the policy will pay only $15,000 if the car suffers a total loss in an accident. The price of the policy is $1,800. There is a 10% chance of having an accident in which the car is a total loss. The focus here is to calculate the expected values with and without...
Walter owns a whole-life insurance policy worth $52,000 that directs the insurance company to pay the...
Walter owns a whole-life insurance policy worth $52,000 that directs the insurance company to pay the beneficiary $260,000 on Walter’s death. Walter pays the annual premiums and has the power to designate the beneficiary of the policy (it is currently his son, James). What value of the policy, if any, will be included in Walter’s gross estate upon his death?
Ashley owns a whole-life insurance policy worth $25,000 that directs the insurance company to pay the...
Ashley owns a whole-life insurance policy worth $25,000 that directs the insurance company to pay the beneficiary $500,000 on her death. Ashley pays the annual policy premiums and has the power to designate the beneficiary of the policy. What value of the policy, if any, would be included in Ashley's estate upon her death?
In Florida, an insurance company charges an annual premium of $6,500 to insure a home worth...
In Florida, an insurance company charges an annual premium of $6,500 to insure a home worth $325,000 for its full value against damage from a hurricane. The insurance company figures that the probability of total destruction of the house from a hurricane is 0.02. The same insurance company charges an annual premium of $1,800 to insure a rebuilt classic motorcycle worth $28,000 for its full value against theft. The insurance company figures that the probability of the motorcycle being stolen...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT