Seward\'s Go-Carts has annual sales of $150 million with an expected profit of $

Question

Seward's Go-Carts has annual sales of $150 million with an expected profit of $5 million. It currently has a retention limit for annual liability losses equal to $5 million. The premium for excess insurance coverage above the $5 million retention is $50,000. With the $5 million retention, its expected retained losses for accidents during the year equal $1 million. Half of all retained losses for accidents during the year will be paid at the end of the year; the remaining half will be paid at the end of the next year. If Seward changes its retention level to $2 million, the premium for excess coverage will be $170,000. Its expected retained losses for accidents during the year will drop to $900,000. Again, half of retained losses for accidents during the year will be paid at the end of the year; the remaining half will be paid at the end of the second year. Premiums are paid at the beginning of the year. Seward's opportunity cost of capital is 10%. Tax rate is 34%. The decision horizon is one year of coverage b/c the firm can change its retention level again the following year.

(A) Calculate the present value of the after-tax change in expected net cash flows from reducing Seward's retention level from $5 million to $2 million. (B) Calculate the present value of the after-tax change in net cash flows from reducing Seward's retention level assuming that actual retained losses equal the retention limits rather than the expected values.

In Step A in #3, shouldn't it be -120,000 in Net before-tax cash flow effect? Also, how did you get 120,000 in Additional Premium?

In Step B, how did you come up with 1,500,000 in Lower Retained Losses?

Sorry I have so many questions. I'm not really understanding this whole question. Do you have access to the textbook solutions that Chegg provides (if you sign up for the textbook solutions)? If you're able to look at the textbook solution, thats what I'm referring to when I say "In Step A in #3" and "Step B."

Thank you,

Sam

Explanation / Answer

repost it plz

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