Derive the after-tax loss matrix for the firm

Reference no: EM132172435

Question - A firm has the following probability distribution for annual losses due to vandalism. All amounts are before any tax consideration. The firm has a tax rate of 20%.

Annual Losses	Probability
$0	0.75
$4,000	0.20
$10,000	0.05

The firm is considering three options:

1. Retention

2. Deductible insurance, Face amount = $10,000, Deductible = $300, Premium = $1300

3. Full insurance, Face amount = $10,000, Premium = $1500

1. Derive the after-tax loss matrix for the firm.

2. If the risk manager's decision rule is to minimize after-tax expected cost, which option will she choose? Show why?

3. What worry value for retention would make the full insurance alternative preferable to retention? Be sure to explain your numerical answer.

4. What worry value or values would make deductible insurance preferred to retention? Be sure to explain your numerical answer.

Reference no: EM132172435

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