Access over 20 million homework & study documents

search

An office building and its equipment are insured to $7,100,000 The

Content type
User Generated
Rating
Showing Page:
1/3
An office building and its equipment are insured to
$7,100,000. The present annual insurance premium is
$0.85 per $100 of coverage. A sprinkler system with an
estimated life of 20 years and no salvage value can be
installed for $180,000. Annual maintenance and operating
cost is estimated to be $3,600. The premium will be
reduced to $0.40 per $100 coverage if the sprinkler system
is installed.
a. Find the rate of return if the sprinkler system is
installed.
b. With interest at 12%, find the payout period for the
sprinkler system.
Solution
Premium saved for each $100 = $(0.85 - 0.40) = $0.45
Total premium saved per year = $0.45 x $7,100,000 / $100
= $31,950
(a) Rate of return of sprinkler is ensured is found by excel
formula =IRR()
IRR = 14.74%
(b) Assuming \"Payout period\" means discounted payback
period (DPBP), we compute the cumulative discounted
annual net benefit in above table.
So, DPBP lies between years 12 & 13.

Sign up to view the full document!

lock_open Sign Up
Showing Page:
2/3
DPBP = 12 + (Absolute value of cumulative discounted
annual net benefit of year 12 / Annual net benefit for year
13)
= 12 + $(4,389 / 6,497) = 12 + 0.68 = 12.68 yearsYearCost
($)Annual Benefit ($)Net annual benefit ($)Discount Factor
@12%Discounted Net annual benefit ($)Cumulative
Discounted Net annual benefit ($)(A)(B)(C) = (B) -
(A)(D)(E) = (C) x (D)01,80,000-1,80,0001.0000-1,80,000-
1,80,00013,60031,95028,3500.892925,313-
1,54,68823,60031,95028,3500.797222,600-
1,32,08733,60031,95028,3500.711820,179-
1,11,90843,60031,95028,3500.635518,017-
93,89153,60031,95028,3500.567416,087-
77,80563,60031,95028,3500.506614,363-
63,44273,60031,95028,3500.452312,824-
50,61883,60031,95028,3500.403911,450-
39,16793,60031,95028,3500.360610,223-
28,944103,60031,95028,3500.32209,128-
19,816113,60031,95028,3500.28758,150-
11,666123,60031,95028,3500.25677,277-
4,389133,60031,95028,3500.22926,4972,108143,60031,95
028,3500.20465,8017,909153,60031,95028,3500.18275,17
913,088163,60031,95028,3500.16314,62417,713173,6003
1,95028,3500.14564,12921,842183,60031,95028,3500.130

Sign up to view the full document!

lock_open Sign Up
Showing Page:
3/3

Sign up to view the full document!

lock_open Sign Up
Unformatted Attachment Preview
An office building and its equipment are insured to $7,100,000. The present annual insurance premium is $0.85 per $100 of coverage. A sprinkler system with an estimated life of 20 years and no salvage value can be installed for $180,000. Annual maintenance and operating cost is estimated to be $3,600. The premium will be reduced to $0.40 per $100 coverage if the sprinkler system is installed. a. Find the rate of return if the sprinkler system is installed. b. With interest at 12%, find the payout period for the sprinkler system. Solution Premium saved for each $100 = $(0.85 - 0.40) = $0.45 Total premium saved per year = $0.45 x $7,100,000 / $100 = $31,950 (a) Rate of return of sprinkler is ensured is found by excel formula =IRR() IRR = 14.74% (b) Assuming \"Payout period\" means discounted payback period (DPBP), we compute the cumulative discounted annual net benefit in above table. So ...
Purchase document to see full attachment
User generated content is uploaded by users for the purposes of learning and should be used following Studypool's honor code & terms of service.

Anonymous
I was stuck on this subject and a friend recommended Studypool. I'm so glad I checked it out!

Studypool
4.7
Trustpilot
4.5
Sitejabber
4.4