A risk manager has collected the following information on employee accidents at PST, Inc.
|
Year
|
# of Accidents
|
Average Cost per Accident
|
|
2013
|
20
|
1225
|
|
2014
|
21
|
1340
|
|
2015
|
19
|
1510
|
He is considering the purchase of a computer-based training program to reduce his worker injury risk in 2016. The training program would cost $20,000 today. It is alleged that the program will reduce the number of employee accidents by 20 percent. The risk manager expects that the program will also reduce the severity of accidents by roughly 10 percent.
Evaluate the differences in the firm's before-tax cash flows for the next three years to determine whether the risk manager should invest in the computer-based training program. Note that the risk manager believes that the appropriate discount rate is 5 percent and you may assume losses (accident costs) are paid at the end of the year. What other assumptions did you make to come up with this estimate? (Note: there are several possible answers to this...just be reasonable and show all work.) Should the risk manager invest in this program?