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Mar-Ten Engines is a manufacturing firm that determined that its payout schedule for its worker's compensation losses is as follows: PV Calculation Year 1 2 3 Payout % 25% 21% 20% 20% 14% 100% 4 5 Total If the firm fully insures this exposure, the premium will be $1,000,000 payable upon inception of the policy. The premium represents 70% loss and 30% administrative expense. a) Demonstrate and explain if there are any cash flow advantages of self-insuring this loss if the firm's cost of capital is 3.7%. All calculations must be shown and your recommendations must be fully supported. b) Describe some other benefits to Mar-Ten for self-insuring the company's workers' compensation exposures.
Mar-Ten Engines is a manufacturing firm that determined that its payout schedule for its worker's compensation losses is as follows: PV Calculation Year 1 2 3 4 Payout % 25% 21% 20% 20% 14% 100% 5 Total If the firm fully insures this exposure, the premium will be $1,000,000 payable upon inception of the policy. The premium represents 70% loss and 30% administrative expense. a) Demonstrate and explain if there are any cash flow advantages of self-insuring this loss if the firm's cost of capital is 3.7%. All calculations must be shown and your recommendations must be fully supported.