Question

9 M & E Toy x Hoa HNH HÀ E G Hàn Chapter 7: End of Chapter Exercises Homework . Due in 5 days 3/13 answered Chapter 7 Review Questions 11 Hook Uwered A firm earns 25 percent interest on its invested capital Interest available on assets that have a low degree of risk and are highly Bould Is 10 percent. The firm is considering retaining a certain risk, but top managers believe that a loss reserve fund of $100,000 is necessary. Insurance against the risk is available for an annual premium of $10,000. On the basis of only these facts, do you believe that the firm should retain this risk, or do you believe that commercial insurance should be purchased? A The commercial insurance should be purchase O B The firm should retain risk Unawered 1 attempt let

Answer 1

Answer: B

The risk should be taken but insurance should not be purchased.

Steps to follow:

Step 1: the minimum rate which has low degree of risk should be searched; 10% rate is smaller than 25%.

Step 2: the amount of loss reserve, which is equal to invested amount, should be searched; this amount is $100,000 here.

Step 3: the minimum risk amount should be searched, which is ($100,000 × 10% =) $10,000.

Step 4: since the minimum risk amount is equal to premium amount, there is no benefit by taking the insurance; therefore, insurance should not be taken.