Question

4. Metal Fabrication Company (MFC) began business in late 2018. MFC's ultimate workers compensation claims for 2019 are expected to be $150,000. Workers compensation claims are expected to grow at a constant rate of 20$ per year. The payout pattern for workers compensation losses is expected to be 60% in the first year, 30% in the second year, and 108 in the third year. MFC self-insures the workers compensation risk. Based on the estimated losses using the 20% trend factor and the pay-out pattern, what total cash outflow for workers compensation should MEC expect in 2019, 2020, 2021 2022, and 2023? (5 pts)

Answer 1

MFC Company is required to pay out its employees on the basis of 60% of entitled compensation on the first year and 30% in next and rest in the further year. As the question specifies that the company begin its business in 2018 than the amount of previous years wouldn’t be considered.

The Total; compensation entitled could be calculated in the manner by application of 20% growth in the excel and then the related cash flows could be calculated as follows –

A B DE 1 Year Compensation amount Payout amount Net Cash flow 2 2019 150000 =60%*B2 =SUM(C2:E2) 3 2020 =B2+0.2*B2 =60%*B3 =B2*30% =SUM(C3:E3) 4 2021 =B3+0.2*B3 =60%*B4 =B3*30% =B2*10% =SUM(C4:E4) 5 2022 =B4+0.2*B4 =60%*B5 =B4*30% =B3*10% =SUM(C5:E5) 6 2023 =B5+0.2*B5 =60%*B6 =B5*30% =B4*10% =SUM(C6:E6)

HAB DE 1 Year Compensation amount Payout amount Net Cash flow 2 2019 150000 90000 90000 3 2020 180000 108000 45000 153000 4 2021 216000 129600 54000 15000 198600 5 2022 259200 155520 64800 18000 238320 6 2023 311040 186624 7776021600 285984

Hence the net cash flow for the year

2019 is $90,000

2020 is $153000

2021 is $198,600

2022 is $238,320

2023 is $285,984