An insurance company offers protection against theft or loss of credit cards. Th

Question

An insurance company offers protection against theft or loss of credit cards. The insurance company will insure a credit card holder against all costs incurred for any credit cards (regardless of the number of cards) lost or stolen during the next three years for a single premium payment of $16.00 per year. Uninsured credit card holders are liable for up to $50.00 on each card that is lost or stolen. A friend has 15 credit cards that she carries together in her wallet. Losing or having the cards stolen is statistically independent from year to year. Your friend's MARR is 10% per year. She believes the probability of losing her wallet in any year is about one in one hundred, or p = 0.01. She asks you to advise her whether or not you would recommend purchasing credit card loss protection for $16.

Explanation / Answer

          6.23

Thus by comparing the above, it can be seen that purchasing credit card loss protection for $16 is not economically viable..

Option A-Cost of Insurance Cost of Insurance $16for 3 years considering MARR@10% 39.872 Average cost per year         13.29 Option B-Cost of Lost/Theft of card Cost of $50 for 15 card with 0.01 P for 3 years 18.69 at 10% MARR Average cost per year

          6.23

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