2. (60 points total) In this portion of the assignment, time value of money is considered. a. A company expects to have annual cash flows of $50,000 for the next four years, and $100,000 in year five, after which it will cease to exist and have no residual value. Assume that all cash flows occur at the end of each year and the interest rate is 5%. (8 points) What is the total value of the company today (before consideration of risk)? b. The company's risk managers have found that there is a 20% probability each year that one lost time injury will occur. If a worker is injured, the company will incur $5,000 in medical expenses and $15,000 in lost time wages, payable at the end of the year. For simplicity, assume that each year's probability is independent of the actual outcomes in the previous year(s) (probability remains constant for each year of the five year term) and the cost of injury remains constant from one year to the next (no inflation). Furthermore, assume that the firm will face residual uncertainty costs of $3,000 each year. (8 points) What is the total value of the company now, recognizing this risk? c. The risk managers have generated a loss control proposal, called Loss Control #1, that will cost the company $1,200 per year. This loss control proposal will reduce the probability of an injury to 12%, but will not reduce the costs of an injury should one occur. Residual uncertainty costs would be reduced to $1,600 per year. (8 points) What is the total value of the company now if Loss Control #1 is implemented?d. The risk managers have identified a second more costly loss control proposal, called Loss Control #2. Loss control #2 will cost the company $2,500 per year but will reduce the probability of an injury to 8% and will reduce annual residual uncertainty costs to $1,200. {3 Points} What is the total value of the company now if Loss Control #2 is implem-ted? e. Instead of entertaining either of the loss control options, the risk managers have obtained a quote from Good Eye Insurance Company whereby all risks associated with an injury would be borne by Good Eye. The annual premium for this policy is set at the expected value of loss plus a loading fee of 40%. Premium will be fixed for the ve year period and will be payable at the end of the year. Under this option, assume that costs associated with residual uncertainty have been eliminated. {3 Paints} What is the total value of the company today if it purchases the insurance protection from Good Eye? f. Finally, assume that Company B offers insurance protection under the same terms as Good Eye but that Company B requires the premium to be paid at the beginning of each year. (3 Willis} What is the total 1tl'alue of the company today it it purchases insurance protection from Company E? g. Among the options outlined below, which risk management technique would you choose? [6 points] I Do Nothing I Loss Control #1 I Loss Control #2 I I Good Eye Insurance Company Coverage Company B Insurance Protection h. Why? {s points}