Homework Answers
Insurance Premium = Probability of Loss * Loss / (1 + Risk Free rate
Insurance Premium = 10% * 200000 / (1 + 0.05)
Insurance Premium = $19047.62
NPV = - PV of Insurance Premium * (1 - Current Tax) +Expected Loss * (1 - Future tax) / (1 + Risk Free Rate)
NPV = - 19047.62 * (1 - 0.35) +200000 * 10% * (1 - 0.15) / (1 + 0.05)
NPV = - 12380.95 + 16190.48
NPV = $3809.52 or $3810
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