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Answers
1 C) physical hazard
2 B) moral hazard.
3 D) owning liability insurance eliminates the possibility of being held legally liable
4 C) Nondiversifiable
5 B) Actual results will more closely approach probable results
6 C) both I and II
7 D) adverse selection
8 A) expense loading
9 B) II only
10 D) passive retention
11 D) Noninsurance transfer
12 C) loss reduction
13 B) securitization of risk
14 D) Mean of total loss distribution
15 A) $1791

Answer 4

Answer 4
Investment of $ 5,000,000
Life of project 12
Depreciation for 5 year on straight line basis =
Depreciation per year $ 2,500,000
Cash inflows per year $ 1,500,000
Tax rate 30%
Required rate of return 14%
a
Year Outflow for investment Depreciation Tax shield Cash inflow from operation
0 $ (5,000,000) $ (5,000,000)
1 $ 2,500,000 $ 750,000 $ 1,500,000 $ 2,250,000
2 $ 2,500,000 $ 750,000 $ 1,500,000 $ 2,250,000
3 $ 2,500,000 $ 750,000 $ 1,500,000 $ 2,250,000
4 $ 2,500,000 $ 750,000 $ 1,500,000 $ 2,250,000
5 $ 2,500,000 $ 750,000 $ 1,500,000 $ 2,250,000
6 $ 2,500,000 $ 750,000 $ 1,500,000 $ 2,250,000
7 $ 1,500,000 $ 1,500,000
8 $ 1,500,000 $ 1,500,000
9 $ 1,500,000 $ 1,500,000
10 $ 1,500,000 $ 1,500,000
11 $ 1,500,000 $ 1,500,000
12 $ 1,500,000 $ 1,500,000
Net Present Value $6,406,939
Internal Rate of Return 42.82%
b 326666.6667 SOLVED IN WORD FILE
assume preeti calculation of 2000.
c
Year Outflow for investment Depreciation Tax shield Cash inflow from operation Set amout for loss reserve Amount of reserve with 4%
0 $ (5,000,000) $ (5,000,000)
1 $ 2,500,000 $ 750,000 $ 1,500,000 2000 2080 $ 2,250,080
2 $ 2,500,000 $ 750,000 $ 1,500,000 2000 2163.2 $ 2,250,163
3 $ 2,500,000 $ 750,000 $ 1,500,000 2000 2166.5 $ 2,250,167
4 $ 2,500,000 $ 750,000 $ 1,500,000 2000 2166.7 $ 2,250,167
5 $ 2,500,000 $ 750,000 $ 1,500,000 2000 2166.7 $ 2,250,167
6 $ 2,500,000 $ 750,000 $ 1,500,000 2000 2166.7 $ 2,250,167
7 $ 1,500,000 2000 2166.7 $ 1,500,167
8 $ 1,500,000 2000 2166.7 $ 1,500,167
9 $ 1,500,000 2000 2166.7 $ 1,500,167
10 $ 1,500,000 2000 2166.7 $ 1,500,167
11 $ 1,500,000 2000 2166.7 $ 1,500,167
12 $ 1,500,000 2000 2166.7 $ 1,500,167
Net Present Value $6,407,803
Internal Rate of Return 42.82%