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
jeff jeffy answered 1 year agoRelated Solutions
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