9A

Property crime rate has recently increased. In case of a burglary, your firm will lose $200 million. The beta of this loss is zero, and the actuarially fair cost of full insurance is $20 million. If you implement a new high-tech security system, the probability of burglary will decline from 11% to 4%, but it will cost $350,000 upfront. The risk-free rate of interest is 10%. If your firm is insured without any deductible, what is the NPV of implementing the new security system? Explain. How would your answer change if the risk-free interest rate is reduced to 5%?