Which of the four options should be chosen

Reference no: EM132213372

Question: The ABC Storage Company provides warehouse facilities mainly for household goods moving companies. Up until now, ABC has fully retained all theft and burglary losses to goods stored at its facility. ABC is considering several risk management alternatives. One is to employ the services of a security company. It is estimated that the security service will have the following effect on the annual loss distribution associated with theft and burglary losses:

Total Annual After-Tax Dollar Losses from Burglary and Theft Dollar Loss Probability Losses No Security With Security $ 0 0.010 0.050 500 0.030 0.120 1,000 0.080 0.200 2,000 0.150 0.300 3,000 0.200 0.150 4,000 0.280 0.090 5,000 0.180 0.050 10,000 0.050 0.030 15,000 0.014 0.010 25,000 0.005 - 50,000 0.001 - 1.000 1.000

The security company will provide the service for $1800 per year. Another alternative considered is burglary insurance. ABC has received a premium quotation of $6000 per year without the security service and $3500 per year with the security service. Assume a one-period model, a tax rate of 50% and an interest rate of 0%.

a. Calculate the expected annual loss from burglary and theft with and without the security service.

b. Calculate the expected annual cost using insurance with and without the security service.

c. Which of the four options should be chosen?

Reference no: EM132213372

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