1. Dilmar's Safety First Corporation is evaluating the inclusion of a new safety id screening device. As the company risk manager you have to evaluate whether or not the new device is a good investment. Conduct a Net Present Value analysis. Determine whether or not the NPV analysis alone justifies the purchase of the new screening device.
The particulars are: The screening device will cost $300,000. The maintenance will be $4,000 per year. The screening device needs special swipe cards that will cost $6,000 per year. It is expected that the insurance premium savings will be $40,000 per year. Loss reduction is expected to amount to $80,000 per year. The screening device has a seven year useful life with zero salvage value. The company is in the 35% tax bracket. Gerardo has determined that the cost of capital for the firm is the appropriate discount rate, that rate is 8%.
PVA formula =
PV=
Time Zero (PV) Years (1-5)
Equipment + Installation costs
Loss Reduction
Premium Savings
Maintenance
Other costs
Before Tax cash flow
Depreciation (straight line)
Taxable base
Taxes 35%
Income after Taxes
Depreciation Reversal
After Tax cash flows
PV discounting
PV time zero cash flows $
Depreciation (straight line= initial cost/ # of years of useful life)
A. A health insurance policy contains a $200 calendar-year deductible, an 80 percent coinsurance provision, and a $2,500 out-of-pocket cap. If a $10,000 covered claim is the only claim made this year, the insurance company will pay
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